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An examination of how – through early adoption of modern core banking software and clear strategic planning – Bank of Shanghai has readied itself for, and is already exploiting, the significant changes taking place in the Chinese banking market.
Case StudyBank Of Shanghai
• Since2006,BankofShanghaihasgrownrevenuesbyacompoundrateof26%ayearandnetfee-basedrevenuesby59%.
• BankofShanghai’srevenuegrowthhasbeenacceleratingsince2005andhasstartedtooutpacepeersyetitsnetinterestmarginhasrisensteadilywhileitslevelofnon-performingloanshasfalleneachyear–meaningthatBankofShanghaihasbeengainingmarketshareatthesametimeaswritinghighermarginandhigherqualitybusiness.
• In2008,thebankhadacost/incomeratio55%belowtheaverageforthetop1000banksand15%belowdomesticpeers.
• In2008,BankofShanghai’sReturnonCapitalwas125%higherthantheaverageforthetop1000banksand15%higherthandomesticpeers.
• Thebankhasmorethan13maccounts,280,000corporatecustomers,7.4mretailcustomers,morethanhalfamilliontransactionsperday–butemploysfewerthan370fulltimeITstaff.
Highlights
TemenosCaseStudy01
02 ExecutiveSummary05 AboutBankOfShanghai06 AnOverviewOfTheChineseBankingMarket12 TheLegacySystemAndItsLimitations14 TheCoreSystemSelection&Implementation15 HowCoreReplacementHasFacilitatedTheExecutionOf
BankOfShanghai’sCorporateStrategy16 • CustomerService17 • ProductInnovation19 • OperationalEfficiency24 • Risk,ComplianceAndManagementEffectiveness26 Conclusions27 Appendices
Contents
BankofShanghai(BOS)israisingthebarandlayingdownachallengetootheraspirationalCityCommercialandJointStockBanks.Throughitsearlyadoptionofamodern,flexibleinternationalcorebankingsystem,ithasleftitselfextremelywellplacedtotakeadvantageofthederegulationtakingplaceintheChinesebankingmarket.Already,itisgrowingassets,depositsandrevenuefasterthanpeers–atthesametimeaswritinghigher-marginandhigher-qualitybusiness.
TemenosCaseStudy02
WhileeconomicboomandurbanisationinChinahaveprovidedthebenevolentbackdropinwhichallbankscouldpoststronggrowthfigures,theopeningupofthemarket
hasincreasedcompetitionandisforcingbankstoimproveefficiencyatthesametimeasraisingstandardsofriskmanagementandcustomerservice.
InresponsetothederegulationandinternationalisationoftheChinesebankingmarket,BankofShanghailaunchedanaggressiveplanforexpansion,underpinnedtoalargeextentbythedecisiontoreplaceitslegacycorebankingsystemwithamodern,integratedsolutionfromTemenos;thefirstmajorbankinChinatoundergosuchasignificantcoretransformationusingapackagedsolution1.
Aswehaveendeavouredtoillustrateinthisstudy,corereplacementhasrenderedBankofShanghaiamuchmoreagileplayerinthemarket,capableofgreaterinnovationandabletobringtomarkettheseproductsandservicesfaster.Whatismore,becauseitscoresystemiscentralisedandintegrated,BankofShanghaiisachievingtheseproductandservicelevelenhancementswhilealsosignificantlyimprovingoperationalefficiency,riskmanagementandcomplianceandthequalityofmanagementinformation.
Therationaleforwritingthisstudyintwopartsisthatthecutovertothenewsystem,TEMENOST24(T24),hastakenplaceinphases2andthebenefitsofmodernisationarestillmanifestingthemselves–especiallyasBankofShanghaienjoysthesignificantscaleadvantagesofaddingmorevolumeandcustomersontoanintegratedplatform.Asregardscustomernumbers,forinstance,BankofShanghaiisaddingaround700,000newretailandcorporatecustomersayear.Yet,givenitsmoderninfrastructure,thebank–directlyandindirectly–onlyemploys367ITemployees.Theresultingoperationalefficiency–whichislikelytoincreaseexponentially–hasbeenprofound:weestimatethebankhasanITcosttototaloperatingcostratio70%belowtheindustryaveragewhileitsoverallcost/incomeis55%belowtheaverageforthetop1000banksandweestimate15%belowtheaverageforcomparableCityCommercialandJointStockBanksinChina3.
But,notonlyisBankofShanghaienjoyingtheeconomiesofscaleaffordedbymoderntechnology,itisalsousingtheassociatedflexibilityandinnovationtoaccelerategrowthinrevenuesand,inparticular,highmarginfee-basedrevenue.ThecombinationofgreaterefficiencyandacceleratingrevenuehashelpedmorethanoffsetthecostsassociatedwithexpandingitsbranchnetworkacrossChina.
Executive Summary
Cost to Income Ratio:BankofShanghaivs.DomesticPeers
35%BOS
40%NCB
40%BoCOM
44%WUC
43%CMBC 41%
HB 37%CMB
37%SPDB
59%BHB
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Cost to Income Ratio:BankofShanghaivs.InternationalPeers
35%BOS
66%BCP
53%RFF
77%AXA
54%PIR
64%BOT
49%MB 43%
AIB
79%ICICI
57%EST
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Sources
1 SeveralChinesebankshaveattemptedcorebankingreplacementusinganinternationalsoftwarepackage.MostbankshavebeensmallerinsizethanBankofShanghaiandfewprojectshavesofargonelive.BankofShanghaiwasthefirstmajorbank(significanttier3orabove)togolivewithaninternationalpackagedsolution.
2 T24wentliveinthecorporatebankinMay2006andintheretailbankinSeptember2008.3 WehavebenchmarkedBankofShanghaiagainst21CityCommercialandJointStockBankswith
similarassetbases.Moredetailscanbefoundinappendix1.
TemenosCaseStudy03
Between2005and2008,BankofShanghaigrewrevenuebyaCAGRof19%andloansbyaCAGRof16%.Thesegrowthratesarebroadlyinlinewiththeoverallbankingsector4,buthavebeenacceleratingovertheperiodasBankofShanghaihasimprovedandbroadeneditsproductandserviceofferings.In2008,BankofShanghaigrewrevenuesby28%,loansby18%(comparedto16%forpeers)5anddepositsby21%(comparedto19%forpeers)6.From2006to2008,thebankgrewnetfee-basedincomebyaCAGRof59%and,bytheendofQ32009,itsratiooffee-basedincometototalincomewas8.9%,roughly1.6timestheaverageforCityCommercialBanks7.
Furthermore,BankofShanghai’sabove-marketgrowthinloansin2007and2008hasnotcomeattheexpenseofassetqualityornetinterestmargin(NIM)8.Rather,thereverseiscorrect:NIMhasincreasedovertheperiod–from2.39%in2006to2.78%in2008(comparedto2.60%in2008forthepeergroup)-whilethelevelofnon-performingloanshasalsofallensignificantlyand,likewise,issuperiortopeers9.
Overall,theachievementsintermsofhigherproductivity,writinghigher-qualityandhigher-marginbusinessandgrowingmarketsharehavetranslatedintomuchhigherreturnscomparedtotheoverallbankinguniverseandtheChinesemarket.In2008,BankofShanghaihadareturnoncapitalthatwas125%higherthantheaverageforthetop1000banksand,moreimportantly,was15%higherthancomparabledomesticpeers10.
Sources
4 Source:CBRC.5 WehavebenchmarkedBankofShanghaiagainst21CityCommercialandJointStockBankswith
similarassetbases.Moredetailscanbefoundinappendix1.6 ibid.7 Thereare10CityandCommercialBanks(CCBs)inourbenchmarkingandtheiraverageratioof
fee-based/totalincomeis5.7%.WebelievethisisbroadlyrepresentativeofCCBsandanalysisfromKPMG,albeitfrom2007,showstheratiotobec.5%–pleaseseeChina’s city commercial banks: Strategic options.
8 WedefineNetInterestMarginasNetInterestIncome/AverageInterestEarningAssets.9 NPLshavefallenfrom3.67%in2006to2.23%in2008,marginallybelowthepeergroupaverageof
2.3%andtheindustryaverageof2.4%(sourceCBRC).10 Sources:TheBanker–top1000banksandourbenchmarkinganalysis.
Return on Capital:BankofShanghaiComparedtoDomesticPeers
6%SDB
10%WUC
14%NB
18%BON
20%NCB
21%HB
23%BOS
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Return on Capital:BankofShanghaiComparedtoInternationalPeers
23%BOS
-1%AXA
8%EST
8%RFF
10%AIB
17%ICICI
21%MB
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
BankofShanghaiHeadquarters
FollowingapprovalfromtheCBRCin2005andwiththehelpofoutsideinvestors,BankofShanghaiisexpandingrapidlyinandoutofitstraditionalShanghaiesebase–butallthewhileadheringtoitsfoundingprinciplesofbuildinglong-termcustomerrelationshipsbasedonoutstandingservice.
BankofShanghai(BOS)wasestablishedonDecember29,1995withinitialcapitalofRMB2.6bn(c.USD300m)raisedthroughamixtureofgovernment,businessandindividualinvestment.
Itwassetuptosupportthedevelopmentofthelocaleconomy,servingprimarilySmall&Mid-sizeEnterprises(SMEs)andindividualcitizensinandaroundthecityofShanghai.Itsguidingmaximisto“servethecustomerwithgreatcareandgrowtogetherwithourcorporatecustomers”.
WhilethebankhascontinuedtobetruetoitsfoundingprinciplesandstilloperateschieflyinShanghai,whereithasamarketshareofapproximately10%ofretailandcorporatebanking,ithasgrownstronglysinceitscreationandbeguntoexpandoutsideofitsShanghaibase.Since1995,thebankhasrecordedannualdoubledigitgrowthinassetsandrevenuesasthepopulationofShanghaihasgrownandithascapturedmarketshare.Further,afterreceivingpermissionfromtheChineseBankingRegulatoryCommission(CRBC)inNovember2005,BankofShanghaibegantoopenbranchesoutsideofShanghai.ItnowhasbranchesinNingbo,Nanjing,Hangzhou,Tianjin,Chengdu,BeijingandShenzhen.Intotal,thebanknowoperatesmorethan200branchesacrossChinaand,asatendof2008,hadtotalassetsofRMB368bn,approximatelyUSD54bn.
BankofShanghaihasearnedmanyaccoladesforinnovationandcustomerservice.WithinChina,thebankhasbeenvariouslyawarded:“ThebestbanktoofferloansforSMEsinChina”,“ThebestcustomerserviceforSMEs”,“ThebestdealerintheChinaInter-bankmarket”,“MostFamousTrademarkinShanghai”and“ChinaBestCallCenterAward”.OutsideofChina,BankofShanghaihasbeenawarded“China’sBestCityRetailBank”byTheAsianBankerforthelastthreeconsecutiveyears.In2009,TheBankerMagazinerankedBankofShanghai256initstop1000bankspublicationbasedontier1capital,up100placescomparedto2006.
ThesuccessofBankofShanghaihasattractedand,inturn,beenreinforcedbynewcapitalfromstrategicforeigninvestors.TheInternationalFinancialCompanytookastakeof7%inBankofShanghaiinSeptember1999,whileHSBCandCommercialBankofShanghai(HongKong)tookstakesof8%and3%respectivelyinSeptember2001.Theseinvestmentshavefacilitatedthegrowthanddevelopmentofthebank,throughtheprovisionoffundsforexpansionbutalsothroughtheprovisionofinternationalmanagementexpertisethathashelpedBankofShanghaitoadaptsuccessfullytothederegulationoftheChinesemarket.
About Bank Of Shanghai
TemenosCaseStudy05
Sources
11 Source:IMF.12 Source:TheNationalBureauofStatisticsChina.13 ibid.14 Source:McKinseyGlobalInstitute.15 AccordingtothePeople’sBankofChinastatistics,citedontheUNwebsite,around65%ofrural
householdsarewithoutaccesstobasicbankingservices.
Overthelastthreedecades,theboomingeconomyplusthemassmigrationfromruralareastourbancentres–underscoredbyanti-competitivegovernmentregulations–hascreatedtheconditionsforallbankstogrow,regardlessofcompetitivedifferentiation.However,thisischanging.ThegovernmentisopeninguptheChinesemarkettogreaterdomesticandforeigncompetitionatthesametimeasliberalisinginterestrates,usheringinaneweraoffreercompetitionthatwillbenefitconsumers,butforcebankstoimproveinnovation,customerservice,riskmanagementandoperationalefficiency.
Chinahasbecometheworld’sfactory.Thecostadvantages–lowrelativecostofcapital,energy,utilities,pollution,wages;taxsubsidies–haveseenmuchoftheworld’smanufacturingshifteast.Since1990,China’sexportshavebeengrowingat18.5%ayear11and,atthestartofthisyear,ChinaovertookGermanyastheworld’slargestexporter.
China’sgreatindustrialisation,however,hasdisproportionallybenefitedurbancentresintermsofjobandwealthcreation.Thedisparitybetweenruralandurbanincomelevelshasbeengrowingandin2009,themeanpercapitalincomeforanurbancitizen(USD2,514)wasalmost3.5timeshigherthanforaruralcitizen12.
Thebetterprospectsforincomeandemploymenthave,inturn,ledtoamassmigrationfromruraltourbanareas.In1980,theruralpopulationofChinawas4.3timesaslargeastheurbanpopulation.By2008,theruralpopulationwasonly1.3timeslarger13.In2008,therewere50citiesinChinawithover1.5minhabitants14.
FortheChineseretailbankingsector,rapidurbanisationhascreatedhighlybenignoperatingconditions,especiallygiventheprotectionfromexternalcompetitionaffordeditformuchofthelast30years.
ThevastmajorityoftheruralpopulationinChinaisunbanked,whereasthemajorityoftheurbanpopulationhasabankaccount15.Theexplanationreflectsbothaccessaswellasneed,sinceincitiesitisfarmorelikelythatemployeeswillreceivewagesthroughabankingintermediary.Therefore,themovementofpeopletourbanareascreatesdemandforbasicbankingservices.
A7%averageannualgrowthintheurbanpopulationsince1980hasallowedallbankstoprosperand,crucially,withoutthecompetitionforcustomers–characteristicofmostdevelopedeconomies–thatobligessustainedimprovementsincustomerserviceandoperationalefficiency.
Urbanisation has been driving the growth in the Chinese retail banking market...
TemenosCaseStudy06
Source:PopulationDivisionoftheDepartmentofEconomicandSocialAffairsoftheUnitedNations
Shifting Demographics:ChangeinRuralandUrbanPopulationssince1985
100
0
800
700
600
500
400
300
200
900
1980 20081984 1988 1992 1996 2000 2004
Rural
Urban
An Overview Of The Chinese Banking Market
TheotherbigsourceofgrowthforthebankingsectorinChinahasbeengrowthincorporatebusiness.China’sunprecedentedeconomicboomhasledtoasurgeincorporatebankingactivity
–basictransactionservices,advisoryservices,loansandsavings.
Furthermore,corporatebankingrelativetoretailbankingismuchmoreimportantinChinathaninmoredevelopedeconomies.Firstly,corporationsareamoreimportantsourceofGDPandGDPgrowththaninmoredevelopedcountries,makingtheirrelativelevelofsavings,forexample,moresignificant16.Secondly,corporationsinvestsomuchmoreasashareofGDPinChinathaninmoredevelopedcountries,makingthemamuchmoreimportantsourceofloansrelativetoconsumers.InChina,businessinvestmentaccountsfor42%ofGDPandprivateconsumption36%ofGDPcomparedto19%and71%respectivelyfortheUS.
AlthoughthecompetitivecharacteristicsofthecorporatemarketinChinaaredifferentfromtheretailmarket,historicrestrictionsongeographicalexpansionlimitedeffectivecompetition.
...while the booming corporate market has been concentrated at the local/regional level
Sources
16 AccordingtotheIMF,China’sGDPhasgrownbyanaverageannualrateof10%since1980andthebiggestcontributortogrowthhasbeenindustrialoutput(roughly60%).InChina,industrialoutputaccountsforhalfofGDPcomparedto,say,19%inFrance.
TemenosCaseStudy07
Comparedtonewlyurbanisedretailbankingcustomers,corporationsaremoresophisticatedusersofbankingservicesandthemarketisbothmorespecialisedandmorecontested.Thatsaid,corporationsneedtousebankswithlocalbranchesandoffices–toallowtheiremployeestowithdrawtheirsalaries,toallowforface-to-facemeetings,etc–andrestrictionsonbanks’domesticexpansioncoupledwithrestrictionsonforeignentrantsmeantthatchoice(andcompetition)waslimited.
Attheriskofoversimplification,whatemergedinthecorporatebankingmarketwasakindofaduopoly,withlargenationwidecorporationsusingservicesfromoneofthebigfourbanksandSMEsusingservicesfromoneofthelocalCityCommercialorJointStockBanks.
Business Investment as a Percentage of GDP:ChinaComparedtoOtherNations(2004-2008)
Source:IMF
42%
14%
Uruguay
UnitedKingdom
Philippines
Brazil
Germany
Sweden
Cambodia
Egypt
Finland
Israel
Macedonia
Netherlands
Poland
Russia
SouthAfrica
UnitedStates
Belgium
Chile
Colombia
CostaRica
Denmark
France
HongKong
Italy
Malaysia
Mexico
Serbia
Switzerland
Taiwan
Turkey
Argentina
Austria
Canada
Ecuador
Greece
Hungary
Portugal
Japan
New
Zealand
Singapore
CzechRepublic
Indonesia
Ireland
Lithuania
SriLanka
Ukraine
Croatia
Slovakia
Australia
Bulgaria
Iceland
Romania
Slovenia
Thailand
Korea
Spain
Estonia
Latvia
India
Mongolia
SolomonIslands
Vietnam
China
AlthoughtheChinesegovernmentspentmanyyearsputtinginplacetheinfrastructuretoallowreform,bankingderegulationandinternationalisationdidnotbegininearnestuntil2006.
Internal reforms (1978 – 2006)
Upuntil1978,theChineseoperatedamonobanksystem.ThebankingsystemwasdominatedentirelybythePeople’sBankofChina(PBOC),headquarteredinBeijing,whichactedasacentralbankandtheonlycommercialbankinthecountrythroughoutthepre-reformperiod1949-78.
Thus,thefirststepofmodernisingthebankingsystemwastobreakupthisonebanksystem.In1978,thePBOC’stwofunctionsweresplit–PBOCwasdesignatedasthecountry’scentralbank,whileitscommercialbankingactivitiesweregiventofourstate-ownedspecialistbanks(the“bigfour”):ChinaConstructionBank(CCB),AgriculturalBankofChina(ABC),IndustrialandCommercialBankofChina(ICBC)andBankofChina(BOC).
However, the Chinese government is deregulating the market...
Thenextstepwastocreategreaterinternalcompetition.Fromthemid1980s,ChinaallowedthecreationofnewJointStockBanks(thosefundedbygovernmentandprivateshareholders)andMishengBank,setupin1996,wasthefirstsuchJointStockBanktobemajority-fundedbyprivateinvestors.TheCityCommercialBanks(CCBs)begantoappearfromJuly1995whencitygovernmentsstartedtorestructurethethousandsofurbancreditcooperativesintolargerandmoreefficientinstitutions.From2004,onachievementofcertainoperatingcriteria,theCBRCbegantogiveapprovalforCityCommercialBankstoexpandoutsideoftheirbasecities;amovethathelpedthisgroupofbankstogainscaleeconomiesandbegintocompetemoreeffectivelywiththejointstockbanksandthebigfour.
Inparallelwiththeexpansioninnumberofbankinginstitutionsandtoimprovesupervision,Chinaalsoremodeledthebankingregulatoryenvironment.In2003,itdividedregulationofthebankingsectorbetweenPBOCandanewentity,theChinaBankRegulatoryCommission(CBRC).ThePBOCassumedresponsibilityforformulatingandimplementingmonetarypolicy(underguidanceoftheStateCouncil),whiletheCBRCtookontheday-to-daysupervisionofthesector,determiningandenforcingbankingrulesandregulations.Oneofthekeyobjectives,andthemajorsuccess,oftheCBRChasbeentoraisethestandardsofriskmanagementandcorporategovernanceinthesectorinpreparationforderegulation:capitaladequacyratios,thelevelofnon-performingloansandtheloanclassificationsystemhaveallimprovedmarkedly17.
Sources
17 Forexample,in2002,theaveragelevelofNPLsforthebigfourwas23.36%comparedwith2.45%attheendof2008–sourceCBRC.
Overview and Timeline of Chinese Banking Reforms to date
Source:Temenos,CRBC
TemenosCaseStudy08
• PBOCgivenroleofcentralbank
• Commercialactivitiesgivento4state-ownedspecialistbanks(“thebigfour”)
• CreationofnewJointStockBanks
• EmergenceofCityCommercialBanks(CCBs)
• PBOCgivenresponsibilityformonetarypolicy
• ChinaBankRegulatoryCommissioncreatedforbanksupervision
• Interbankmarketformed
• SecuritiesandInsuranceregulatoryboard
• Allowingwhollyforeign-ownedbankstoprovidelocalcurrencyservices
• Eliminationofsomespecialregulationsforforeignbanks
• AllowingCCBstooperateoutsideoftheirhomecities
• Lendingceilingrateremovedgradually
• Foreignbankstakeraisedto25%
• Depositfloorrateremoval
Breakingupthemonobanksystem
Allowingmoredomestic
competition
Remodellingregulatorysystem
Openingupthemarket
Quasi-freemarketcompetition
1978 – 1984 1984 – 1996 1996 – 2001 2001 – 2006 2006 – 2009
Overview of the Structure and Composition of the Chinese Banking Sector
Source:CRBC
Greater internationalisation and deregulation (2006-present)
AccessiontotheWorldTradeOrganisation(WTO)hashadthebiggesteffectinopeninguptheChinesebankingmarket.
AspartofitscommitmentstojointheWTO,Chinaagreednotonlytoreduceimportandexporttariffs,butalsotoopenupvariousindustries,includingfinancialservices,toforeigninvestmentandcompetition.Chinahadafiveyeardeadlinefromitsentryin2001inwhichtoenactthenecessaryreforms.
AlthoughforeignbankswereallowedtotakeminoritystakesinlocalbanksbeforeWTOentry,thereweremanyrestrictionsonsuchinvestmentsanditwasnotuntil2006thatthemostsignificantreformscameintoeffect.
The most significant reforms made since WTO accession can be summarised as follows:
1.Foreign-ownedbanksareallowedtoprovidelocalcurrencyservicestoanycustomerinanycityinChina(takingofindividualdeposits,thegrantingofshort-termaswellaslong-termloansaswellasbankingcardbusiness).Beforethereforms,provisionoflocalcurrencyserviceswasrestrictedto25citiesandonlytobusinessesandforeignindividuals.
2.Therestrictionsonforeignownershiphavebeenraised,suchthatasingleforeigninvestorcannowownupto20%ofadomesticbank,whileforeigninvestorscanholdupto25%inaggregate.
3.ThelimitofRMBliabilitiesnotexceeding50%offoreigncurrencyliabilitieswasremoved,allowingforeignbankstoexpandtheirlocaldepositbases.
4.Thenumberofproductsandservicesthatforeignbankscanprovidenowexceeds100,includingderivativestrading,QFIIcustodianbusiness,personalwealthmanagement,offshorebankingserviceonanagencybasisandelectronicbanking.
Inaddition,Chinahasmadeimportantstepstowardsinterestratederegulation.Between1997and2008,short-terminterbankinterestrates,financialandTreasurybondyieldsandthecorporatefixedincomemarketwereallliberalised.Mostrecently,ceilingsonloanratesandfloorsondepositrateswereremoved,givingbankstheflexibilitytosetlendingratesabovetheregulatedfloor.Importantly,however,aceilingondepositratesandaflooronloanratesarestillinplace,withonlyaroundtwo-thirdsofloanstakingplaceatratesabovethisfloor.
TemenosCaseStudy09
Chinese BankingSector
StatePolicyBanks(3)
CommercialBanks(-370)
CreditCo-operatives(-30,000)
Others
StateOwnedCommercialBanks
(4)
JointStockCommercialBanks
(12)
CityCommercialBanks
(136)
ForeignBanks(196)
RuralCommercialBanks
(27)
Thereformsintroducedsincethe1990shaveledtoariseinthenumberofdomesticbanks,increaseddomesticcompetitionand,aboveall,aconsiderableinfluxofforeigninvestment,particularly
intheformofnewsubsidiariesandbranchespostWTOentry.
SincethecreationofShenzhenCityCommercialBankinJuly1995,over135cityCCBshavebeencreated.Whatismore,theCBRCannouncedin2004thatthestrongestCCBs(thosewithNPLandCARratiosbelowtheaverageforJointStockBanks)wouldbeallowedtoexpandtheirbranchnetworksandcompeteonanationalbasis.Sincethattime,morethan30CCBshaveobtainedapprovalforcross-regiondevelopmentandhaveexpandedtheirnetworkstomorethan20newcities18.Theimpactonlocalcompetitionofthismoveisalreadymanifestingitself–since2005,CityCommercialBanksgained1.2pointsofmarketshare(morethan20%)attheexpenseofJointStockBanksandthebigfour.
...opening local markets to greater competition...
Sources
18 CRBCandResearchinChina.19 CRBC,ReportontheOpening-up of the Chinese Banking Sector,January2007.20Datatakenfrom2007and2008CRBCannualreports.21 CRBC,ReportontheOpening-up of the Chinese Banking Sector,January2007.22 CRBC2008AnnualReport.
Share of Total Chinese Banking Assets by Banking Segment (RMB 100bn), 2005-2008
Source:CRBC
Intermsofforeigninvestment,followingWTOaccession,thischangedinformfromtakingminorityequitystakestosubscribingtobankingIPO’sand,ultimately,todirectinvestmentinbranchesandsubsidiaries.AccordingtostatisticsfromtheCRBC,inthefiveyearsfollowingWTOmembership,thenumberofoperationalentitiesopenedbyforeignbanksincreasedby64%,despiteseveralmergers19.AlsoaccordingtotheCBRC,theamountofforeigncapitalinvestedintheChinesebankingsystemhadreachedUSD82.3bnbytheendof2007and25Chinesebankshadpartnershipswithforeigninvestors.Foreignbanksemployedmorethan27,000staffinChinabytheendof200820.
Whetherdirectly,throughbranchesandsubsidiaries,orindirectly–throughincreasedcapital,improvedmanagementorhigherexpectedreturns–foreigninvestmenthasledtogreatercompetition.LikeCCBsandalbeitfromamuchlowerbase,foreignbankshavealsobeengrowingmarketsharesince2005(growingassetsataCAGRof23%vs.theoverallmarketof19%),underlyingthechangingdynamicsandincreasedcompetitivenessofthemarket.
Moreover,theinfluenceofforeignbanks–directlyandindirectly–alongwithstrongerdomesticcompetition,isleadingtogreaterproductinnovation.AstheCBRCnotes,“theentryofforeignbanksalsobringsinadvancedmanagementskillsandtechnology,aswellasmatureandmarket-testedproductsandservices,andhelpstheChinesebankstoraisetheirfinancialinnovationcapacity”21.Theinnovationscanbeseeninthegrowingrangeandconsumptionofproductsandservicesaroundderivativestrading,personalwealthmanagement,electronicbankingandcreditcards.In2008,1.78bncreditcardswereissuedinChinaandcreditcardtransactionsgrewby27%,whilethetake-upofwealthmanagementproductsgrewby372%22.
TemenosCaseStudy10
SOCBs
JSCBs
CCBs
Others
100
0
300
200
2005 20082006 2007
600
500
400
700
TemenosCaseStudy11
...giving customers more choice and forcing banks to become competitive
TheincreaseinthenumberofbanksoperatinginChina,coupledwiththeremovalorrelaxationofrestrictionsonwherethesebankscanoperateandhowtheycanbefunded,hasgivenretail
andcorporatecustomers–particularlySMEs–morechoiceintermsofwhotheybankwithandalsowhatproductstheytake,forcingallbankstodomoretoattractandretaincustomersandimproveinnovation.Furthermore,thegradualliberalisationofinterestrateshasenabledbankstobegintocompeteonprice,underliningtheimportanceofriskmanagementandoperationalefficiency.
Itisourcontentioninthiscasestudythatthisnewcompetitiveparadigmwillforcebankstochangethewaytheydobusiness(improvinginnovation,customerservice,riskmanagementandefficiency)and,interalia,theywillhavetoaddresstheirITsystems.TheremainderofthecasestudyisdedicatedtoshowinghowBankofShanghai,byreplacingitscoresystem,hasleftitselfextremelywellplacedtotakeadvantageofthesechangesintheChinesebankingmarket.
BankofShanghai’slegacysystemsufferedseveralshortcomings–notleastitssiloedstructureanditsaccount–asopposedtocustomer-centricity–whichmadeitexpensivetomaintain,difficulttomodifyandnotconducivetoeffectiveriskorcustomermanagement.
TemenosCaseStudy12
Thefirstofthemajorproblemswiththelegacysystemwasitssiloedstructure.Thebankoperatedseparatesystemsforretailbanking,corporatebanking,riskmanagementandcash
management.Thisclearlymaderiskdifficulttomanageadequatelyandmaintenanceexpensive,butitalsomadeitimpossibleforthebanktogiveseamlessservice–toassistacorporatecustomerwithapersonaltransaction,forexample,atellerwouldhaveneededtologintoadifferentsystem,requestnewinformationfromthecustomer.Furthermore,operatingdifferentcorporateandretailsystemsmadeitextremelydifficulttoofferoverlappingcorporateandretailproducts–and,asweshallseelater,BankofShanghaihasenjoyedmuchsuccessandleapfroggedcompetitorsbyofferingjointcorporateandretailbankingproducts.
Second,thesystemwasaccount-asopposedtocustomer-centric.Undertheoldsystem,BankofShanghaiwasunabletogetacompleteviewofthecustomer–onlyacompleteviewattheaccountlevel.Clearly,therefore,itwasimpossibletocross-selleffectivelybasedoncustomerinformationand,likemostbankswhosufferfromthesamelimitations,customerpromotionstendedtobegenericratherthantargeted.Similarly,itwasalsoextremelydifficultforBankofShanghaitodifferentiateintermsofcustomerserviceorpricingbasedoncustomerinformation–toofferpreferentialpricing,forexample,tothemostprofitablecustomers–andthereforeretainthebestcustomers.Nothavingasingleview,moreover,renderedimpossibleeffectivechannelmanagement–forexample,acustomerwouldhavehaddifferentinternetlog-indetailsforeachproduct.Lastly,itwasunfeasibletogetaconsolidatedviewofriskattheclientlevel–acustomermighthavehadmanyproducts,eachwithanacceptablecreditlimit,butinaggregategivinghim/heraccesstocreditfarinexcessofwhatwouldhavebeenapprovedotherwise.
Third,thesystemwasextremelycomplexandbadlydocumented.Ascanbeobservedinthediagrambelow,thelegacyarchitecturewashighlycomplex,withmanyindependencies,andthesystemswerenotonlybadlydocumented,butinpartshard-coded.Asaconsequence,routinemaintenancewashighlytime-consumingandexpensive–updatingthesystemsforachangeininterestrates,forexample,wasanovernightexerciseinvolvingsixprogrammerscomparedtoa30minutetasknow.Furthermore,notonlydidmaintenanceabsorbdevelopers’timethatcouldotherwisehavebeenspentdevelopingnewproducts,buttheactoflaunchingnewproductswasalsohighlycumbersome–involvingcodechanges,replicatingdevelopmentacrossthedifferentsystemsandasignificantamountoftesting–andtakingmanymonths.
The Legacy System And Its Limitations
TemenosCaseStudy13
Depiction of Bank of Shanghai’s Legacy Core Banking System
Source:BOS
Lastly,thesystemlackedkeyfunctionalityandwasunabletosupportmanyofthebank’sinternationalrequirements.Asnotedabove,China’seconomyisbeingincreasinglyinternationalised–andsoitisnosurprisethatBankofShanghai’scustomersarerequiringanevergreaterlevelofinternationalservices.Moreover,asBankofShanghaihadanticipated,theinfluxofforeigncompetitorsisbringinginternationalstandardsandproducts.So,thebankwasalsokeentoaddressmanyofthefunctionalshortcomingsofitslegacysystem–particularlyaroundinternationalpayments,tradefinance,workingcapitalmanagement–inordertocompeteeffectivelyinamoreinternationalisedmarketplaceandoffertheproductsandservicesdemandedofitinamoreglobalisedworld.
Debit Card
Foreign Currency / TF
Retail CNY
Corporate CNY
TellerTerminals
Corp.BFE
SecurityCo.
Others
Enq.Machine
InternetBankingSys.
Mobile
CallCentre
Telephone
Mobile
POS
ATM
AuditSys.
Fee-based
SealMgt.
InternationalSett.
ElectricPswd.
OA
HR
CapitalMgt.
PBOC
FundsCo.
CUP
TaxBureau
Custom
RetailBFE
CreditMgt.Sys.
PersonalLoanMgt.
FinanceMgt.
CurrencyMgt.
ReportSys.
GL
RetailBFE
Corp.BFESecurityAgency
CUP
CNAPS
HouseFunds
PROP
FundsAgency
BankofShanghairanadetailedselectionprocessconsideringmostoftheimportantglobalanddomesticvendors,aswellastheoptionofaninternalbuild.Intheend,thebank’sdesiretoadoptinternationalbestpracticecausedittocomedowninfavourofaninternationalsolution,withTEMENOST24(T24)beingconsideredbestbasedonlevelofintegration,functionalcoverageandreferences.Onceselected,theT24implementationwascarriedintwostages–thecorporatebankgoingliveinMay2006andretailbankgoingliveinSeptember2008.
TemenosCaseStudy14
By2002,BankofShanghaihadmadethedecisiontoreplaceitslegacysystem.Atfirst,alloptionswereconsidered–thatis,arebuildusinginternalandexternalresources;apackagedsolutionfromadomesticvendor;and,apackagedsolutionfromaninternationalvendor.However,thefirsttwooptionswerequicklydiscounted–inthecaseofthefirst,thebankbelievedthatthiswouldtaketoolongandthemarketwaschangingtooquicklytoallowthis;and,inthecaseofthesecond,thebankconsideredthatlocalvendorshadinsufficientknowledgeofinternationalpractices.So,inearly2003,thebankbeganaselectionprocesstochooseasolutionfromaninternationalvendor.
Theselectionprocesslasted10months–fromFebruarytoNovember2003–andfourinternationalvendorswereinvitedtopartcipate,namelyTemenos,FNS(nowpartofTCS),SystemAccess(nowasubsidiaryofSungard)andi-flex(nowOracleFinancialServices).
Thebankwaslookingforthefollowingattributesinitschosensolution:customer-centricity;quickproductdevelopmentcycles(affordedbyahighdegreeofparameterisation);strongout-of-theboxprocesscentredoninternationalbestpractice;andfullintegrationacrossthedifferentbankingfunctions(andasinglecustomerview).
Overthecourseofthecompanypresentations,productdemonstrations,workshopsandreferencevisits,thedifferentvendors’productswerescoredagainstarangeofcriteria.TemenosandT24emergedastheeventualwinneronaccountofachievingtopmarksinthefollowingcategories:
• Levelofintegration.• Customerreferences.• Implementationrecord.• Functionalcoverage.• Strengthofbusinessprocesses.
The Core System Selection
The Core System Selection & Implementation
TemenosCaseStudy15
Timeline of the Core System Roll-Out at Bank of Shanghai
Source:BOS,Celent,Temenos
Atimelineoftheimplementationisshownbelow.Insummary,theimplementationtookthreeandahalfyearstocomplete,wasdividedintotwophasesandinvolvedateamofalmost250people.
Thattheimplementationtooksuchaprotractedperiodreflectsmanyfactors:thelocalisationoftheT24systemthatwasneeded(totranslateallofthesystemintoChinese,forexample);thefunctionalitythatneededtobebuilt(tocomplywithregulatoryreportingrequirements,etc);duplicatingactivities(likeproductlaunches)acrossthenewandoldsystems;datamigration(BankofShanghaihadover13maccountsbythetimeT24wentliveintheretailbank);thelevelofprocessre-engineeringundertakenbythebank(andassociatedusertraining);and,theextentofthetestingnecessary–technicalandbusiness.
Theprojectwasdividedintotwophasesinordertomitigaterisk.Thebankfeltthat,whilecorporatebankingisinherentlymorecomplexthanretailbanking,embarkingonthecorporatebankingroll-outfirstwouldbelessriskygiventhemuchlowervolumesandwouldprovidetheprojectteamwiththeskillsandexperiencetoensurethattheretailbankingimplementationwentassmoothlyaspossible.
TheimplementationteamcomprisedstafffromTemenos,HewlettPackard(whowereselectedasthemainsystemintegrationpartnerattheendof2004)andBankofShanghai.Roughly,therewerearound20peoplefromTemenos,20peoplefromHPand200fromthebankinvolvedintheproject–althoughpeaknumberswerehigher,wellover250people.
The Implementation
BankofShanghaiwentlivewithT24inthecorporatebankonMay22,2006andintheretailbankonSeptember22,2008.Althoughtherewasatimeoverrunandanassociatedbudgetoverspend,thesewereminor–andthebankconsidersthistobeaverywellmanagedproject.
Moreimportantly,asthefirstmajorbankinChinatogoliveonaninternationalcorebankingsystem,BankofShanghaiviewsthisprojectnotjustaswell-managed,butasaveritabletourdeforce.SeveralotherinternationalcorebankingreplacementshavebeenattemptedinChina,butmosthavebeensmallerprojectsthanBankofShanghai’sandfewhavesuccessfullygonelive.Asweshallseeinthenextsections,theT24corereplacementhasendowedBankofShanghaiwithalevelofflexibilityuniqueamongitspeers;alevelofflexibility,moreover,thatitisleveragingtooutmanoeuvreitscompetitorsinanumberofimportantways.
Corporate Banking RetailBankingSystem20082004 2005 2006 2007
Selection
March1Kickoff
September22RetailSystemgo-live
SetupTemenosT24demonstrationserver
Retailsystemgolive
Requirementsanalysis,familiarisationwithnewsystem
SelectionofHPassystemintegrator
SystemarchitecturedesignedbyHP
Confirmrequirements,systemdevelopment
Functionalitytesting
MigrationofGLtoPeoplesoft
Ningbobranchgolivewithcorporatesystem
Allbranchesgolivewithcorporatesystem
Stabilisationofcorporatesystem
Confirmrequirements,systemdevelopment
Functionalitytesting
Integrationtesting
Datamigration
May22CorporateSystem
go-live
How Core Replacement Has Facilitated The Execution Of Bank Of Shanghai’s Corporate Strategy
BygivingBankofShanghai(BOS)themeanstolaunchproductsfaster,toservicecustomersbetter,totakequickerandbetter-informeddecisions,topriceriskeffectivelyandextractITeconomiesofscale,T24hasactedasacatalystformarketsharegainsandsuperiorreturns.
TemenosCaseStudy16
TheoverridingobjectiveofBankofShanghai’scorereplacementwastointroducegreateragilityintotheorganisation,tocapitaliseontheinternationalisationandderegulationoftheChinesebankingmarketinordertorealiseitsambitiousgrowthprospects.
Asshallbedemonstrated,byaffordingasingleviewofthecustomer,T24hasmadepossiblesignificantimprovementsincustomerservice;T24hasdramaticallyreducedthecostandtimetomarketfornewproducts;T24,asanintegratedandrobustsolution,hasallowedthebanktoextractITeconomiesofscaleandtherebyredeployresourcestootherpurposes,likebranchexpansion;and,byofferingup-to-date,integratedandcompleteinformation,T24hasconsiderablyimprovedriskgovernanceandmanagementdecision-making.
Asshallalsobedemonstrated,theseoperationalimprovementshavetranslatedintobetterabsoluteandrelativefinancialperformance.In2008,BankofShanghai’sfinancialperformancebegantooutperformpeers:growingassets,depositsandrevenuesfasteratthesametimeaswritingbetterqualityandhighermarginbusiness–asevidencedbyahighernetinterestmargin(NIM)andlowernonperformingloans(NPLs).Overall,thishasallowedBOStorecordhigherreturnsthanpeers.
TemenosCaseStudy17
Asregardsservingthecustomer,thebiggestchangeengenderedbycorereplacementwastoaffordBankofShanghaiasingleviewoveritscustomerrelationships.Thisuniqueviewhasgiven
BankofShanghaithetoolstobeabletoprovidebetterservicetoall–throughenhancedchannelmanagementforexample–whilegivinghighlydifferentiatedservicetoitsbest,mostprofitablecustomers.Thishashelpedtoattractnewbusiness–allowingBankofShanghaitogrowfasterthanpeers–whilealsohelpingittoearnhigherreturnsthroughgreatercross-selling,greaterfee-relatedincomeandlowerlevelsofNPLs.
ChannelmanagementhasimprovedsignificantlywithT24.Withthesiloedlegacysystem,BankofShanghaicustomerssufferedsmall,everydayfrustrations–likehavingtologinmorethanoncetoviewinformationabouttheirdifferentaccounts.Andwhilethesefrustrationsarenotuncommonamongbankingcustomersand,toasurprisingdegree,arestilltolerated,theyhavenowbeeneliminatedforBankofShanghaicustomers.Internetusers,tellers,callcentrestaffallviewdatathatiscompleteandup-to-date,improvingthecustomerexperiencebyspeedinguptransactionandquerytimes.Oneofthemanifestationsofthisimprovementisthenumberofcustomerswhoarenowhappytoconductthebulkoftheirbankingaffairsovertheinternet.In2008,thenumberofretailbankingtransactionscarriedoutovertheinternetbyBankofShanghaicustomersroseby685%,morethan6timesfasterthantheoverallmarket23.
Decisionscannowalsobetakenfaster.Becausecustomerinformationisup-to-dateandcomplete,ittakeslesstimetogathertheinformationneeded–andrunanychecks–forthebanktobeabletotakedecisions.Thetimetakentoapproveandgrantamortgage,forexample,hasbeenreduced75%;itnowtakesjustoneweek.
AcompleteviewallowsBankofShanghaitodifferentiate.Firstly,onapracticallevel,T24makesitpossibleforthebanktoflagaprioritycustomerinthesystem–byallowingthebanktosetupspecialistgroupswithinthecustomerfile.Before,thebankhadtousenon-systemmeasures,likeissuingaseparatecard,todistinguishitsbestcustomers.Secondly,anoverviewofcustomerrelationships–asopposedtojustanaccount-levelview–allowsthebanktotakeintoaccountalloftheproductsandservicesacustomerconsumesand,importantly,tocalculateprofitabilitybyclient.Armedwiththisinformation,BankofShanghaican,anddoes,tailorserviceinordertoretainitsmostvaluablecustomers.Forinstance,VIPcustomersbenefitfromadifferentchannel–thegreenchannel–atbranchestoremovetheneedtoqueue;adedicatedaccountmanager;lowerfees;privilegedproducts;alowerdepositrequirementforhomeloans;and,betterratesonloans(tothemaximumextentpossiblegivengovernmentlimits).
Customer Service
“All BOS customers will have noted an improvement in service since T24 was introduced.”Mr.Jiang-VicePresident-BankofShanghai
Sources
23 AccordingtoChinaCCMMarketResearchCentre,thegrowthinonlineretailbankingtransactionswas100.8%in2008.
24 Source:CBRC.25 Forpeercomparisons,wehavebenchmarkedBOSagainst21CityCommercialandJointStockBanks
withsimilarassetbases.
685%growthinonlineinternettransactionsin2008
75%reductionintimetakentograntamortgage
And,theenhancedcustomerserviceisclearlytranslatingintobetterfinancialperformance.In2008,BankofShanghaimovedfromasituationofin-lineperformancetooneofclearoutperformance.Itgrewloansat18%comparedtotheaverageforJointStockBanks(JSBs)of15%24andthepeergroupaverageof16%25anditgrewdepositsat21%comparedtotheaverageforJSBsof14%andthepeergroupaverageof19%.Moreover,becauseitssystemnowallowsbetter,morepersonalisedservice(aswellasasuperiorproductoffering–seelater),BOShasalsobeguntoacceleratehighermarginactivitieslikefee-basedrevenues(whichhavegrownbyaCAGRof59%overthelast2years)andcross-selling(weestimatethatrevenuepercustomerroseby16%in2008)–helpingitalsotorecordhigherreturnsthanpeers(seelater).
TemenosCaseStudy18
ThetimetakentolaunchnewproductshasbeenshortenedsignificantlysinceBankofShanghaiadoptedT24.Whereasunderthelegacyarchitecture,productlaunchestooktypicallyseveral
months,theynowtakebetween2to4weeksingeneral.Someproducts,liketherecentguaranteedreturndeposit,aretakingevenlesstime–inthiscase,underaweekfromconceptiontolaunch.Thebankestimatesthatproductdevelopmenttimeshave,onaverage,beenreducedbybetween60and75%.
Theeffortinvolvedinlaunchinganewproducthasalsobeencutconsiderably.Intheoldsystem,productdevelopmentwouldhavenecessitatedchangingthecorecode.Itwouldhaverequired,furthermore,duplicatingthedevelopmentsacrossallofthedisparatesystemsaffected–retail,corporate,debitcards,etc.Thismeant,inpractice,thatproductdevelopmentwasanactivitythatconsumedseveralfull-timetechnicalresourcesforextendedperiods.Incontrast,withT24,theactoflaunchingnewproductsislimitedtochangingparameterswiththesystem,meaningthatdevelopmenteffortisminimal.Theeffortisconcentratedinsteadontestingand,giventhemuchlesscomplexdevelopmentundertaken,testingisalsosignificantlyreducedunderT24comparedtothelegacyenvironment.Overall,therefore,notonlyhaveproductdevelopmentcyclesbeenreduceddramatically,butalsothedevelopmenteffort–meaningthatdevelopmentcostshavebeencutbyanevengreaterpercentage,probablyinexcessof90%.
Product Innovation
“T24 has enabled Bank of Shanghai to launch a number of truly innovative and pioneering products, in particular by combining corporate and retail products. Not only that, but T24 has also dramatically reduced the time to market for new products – by a factor of several times.”Mr.ZhaoGang-GeneralManager-ProductInnovationDepartment
Anewproductislaunchedevery1-2weeks.Developmentcostshavebeencutbyprobablyinexcessof90%.
Asaresult,BankofShanghaiislaunchingmorenewproducts,andinmorerapidsuccession.SincetheintroductionofT24,thebankhasbeenreleasinganewproductonaverageevery1-2weeks.
Whatismore,notonlyisthebanklaunchingmoreproducts,itisalsolaunchingmoreinnovativeproducts.Forexample,BOSwasthefirstbankinChinatoofferacombinedretailandcorporatecard.Thecardactslikeacorporatecreditcard,exceptthatitallowsspendingtobedebiteddirectlyfromacorporatebankaccount.Further,likeacorporatecreditcard,thecorporationcansetalimitthatcannotbeexceeded,butunlikeacreditcard,thislimitcanbeappliedindividuallyorinaggregateacrossmanycards.Thiscanbeusefulincontrollingspendingonaparticularprojectforexample,andthelimitscanbereseteasily,meaningthatthesamecardscanbere-usedforseveralprojects.Thecardalsodisplayssomeretailcardcharacteristics,liketheemployeecanchargethecorporatecardwithmoneytouseforpersonalpurposes.Thecardwasoriginallydesignedforusebygovernmentagencies,tohelpcontrolspendingoncertainprojects,butitsusagehasbeenextendedtoallgovernmentandcorporateclientswithsignificantsuccess.
TemenosCaseStudy19
Othernewinnovativeproductshaveseenverystrongtake-up.Anall-in-oneaccount,whichcombinesdifferentdeposits(current,term)withwealthmanagementproducts(likeprincipalprotection),FXproductsanddirectdebit,waslaunchedbyBOSinApril2009andhadseenover500,000adoptersbyNovember2009.Similarly,whenBankofShanghaiwasthefirsttier2or3banktointroduceElectronicNationalBonds(ENBs),ittookmorethan450mRMB(c.USD70m)innewcustomerfundsinlessthan3months.ENBswereintroducedbytier1banksinMarch2009and,becauseofitsflexiblesystems,BankofShanghaiwasabletoreplicatethefeaturesandintroducethesameproductthreemonthslater.ENBsbringtogetheraspectsofgovernmentbonds–fixedcoupon,lowriskinvestment–withaspectsofanormalsavingsaccount,whereinterestispaidregularlyratherthanjustattheendofthebond’slifewhentheprincipalisreturned.BOScustomerscanbuyandsellENBswiththeirregularsavingspassbookandBOS,inadditiontoasmallinterestspread,alsoearnsfeesoneverytransaction.
Likeenhancedcustomerservice,improvementsinproductinnovationarereflectedmostclearlyinmarketsharegains,althoughtheyarealsoacontributingfactorinBOS’superiorreturns.Asdescribedinthelastsection,in2008BankofShanghaigrewassetsandloansfasterthanthemarketandfasterthanpeers.Thesameisalsotrueofoverallrevenue,whichitgrew4%fasterthanpeers,andinparticularfee-basedrevenues.AttheendofQ32009,BOS’leveloffee-relatedincomewas8.9%oftotaloperatingincome,1.6timeshigherthanotherCityandCommercialBanksand1.2timesthepeergroup.
Sources
26 Forpeercomparisons,wehavebenchmarkedBOSagainst21CityCommercialandJointStockBankswithsimilarassetbases.Moredetailscanbefoundinappendix1.
Net Interest Margin: BankofShanghaiComparedtoDomesticPeers,2006-2008
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Allinall,highercross-selling,greaterfee-basedincomeandastickierdepositbasehavehelpedtoincreaseBankofShanghai’sNIM–toalevelthatisnowsuperiortopeers.In2006,BOS’NIMwas2.36%comparedtothepeeraverageof2.49%,whereasitnowstandsat2.78%comparedto2.60%forpeers26.
2006
2007
2008
BOS CMBCB CEB0%
3%
2%
1%
4%
BOBSPDB HB BONSDBCMBC
TemenosCaseStudy20
BanksthatrunlegacysolutionsarenotoriouslypooratextractingITeconomiesofscale.WithT24,BankofShanghaiisalreadysettingitselfapartinthisregard.
Insomeareas,likemaintenance,costshavefalleninabsoluteterms.Asanexampleofhowthisispossible,considertheprocessofupdatingthesystemforratechanges.Whenthegovernmentchangesrates,thebanksmustreflectthesechangesovernight.Thisisacomplicatedprocessinthatthegovernmentmandatesratesacrossmanydifferentareas–personalloans,homeloans,deposits–andacrossmanydifferenttermsandcurrencies(seethematrixbelowasanillustration).Withthelegacysystem,BankofShanghaiwasonlyabletomeettheovernightdeadlinebyhavingateamofsixprogrammersworkthroughthenighttomakethechanges(writingthenewcode)andcarryoutthetesting.WithT24,therateadjustmentsettingprocesshasbeenfullyparameterisedbasedonacomprehensivesetofrules,reducingtheprocesstoa30minuteactivityfortwoITstaff(onetochange,theothertoverify).
Operational Efficiency
“It is still early days in terms of achieving economies of scale. T24 gives us a centralised and robust platform which will allow us to scale our business at the same time as leveraging our IT investments.”Mr.Bai-ITGeneralManager
Theprocessofupdatingthesystemforratechangeshasbeentransformedfromanovernightdevelopmentexerciserequiring6programmerstoa30minuteactivityfortwoITstaff.
Courtesy:ChinaDaily
TemenosCaseStudy21
Example of Interest Rate-Setting Matrix (following rate changes in December 2008)
Source:BOS
Continued...
Retail, corporate customer saving rateITEM TERM Beforerateadjustment After rate adjustment 2008.11.27 2008.12.23
Current deposits – 0.36 0.36
Term deposits Timedeposits 3months 1.98 1.71 6months 2.25 1.98 1year 2.52 2.25 2years 3.06 2.79 3years 3.60 3.33 5years 3.87 3.60
Periodicprincipaldeposits 1year 1.98 1.71 andwithdrawalallatmaturity
One-sumDepositatstartand 3years 2.25 1.98 withdrawalperiodically
Principaldepositsatstartand 5years 2.52 2.25 withdrawtheinterestsonlyinperiods
Timeorcurrentdepositsatoption 60%oftheratefortimedepositsofthesameterm
Call deposits 1day 1.17 0.81 7days 1.17 1.35
Agreement deposits – 1.53 1.17
Foreign currency saving rate Annual rate% ITEM (USD) (EUR) (HKD) (JPY) (GBP) (CAD) (CHF) (AUD)
Current 0.1200 0.1000 0.0200 0.0001 0.1250 0.0100 0.0001 0.25007 day call 0.1200 0.3750 0.0200 0.0005 0.1750 0.0500 0.0005 0.30001 month 0.3000 0.5000 0.1500 0.0100 0.2500 0.1000 0.0100 1.25003 months 0.5000 0.6500 0.4000 0.0100 0.3500 0.1500 0.0100 1.31256 months 0.7500 0.9500 0.5000 0.0100 0.6000 0.3000 0.0100 1.32501 year 1.2000 1.1000 0.8000 0.0100 0.7500 0.4000 0.0100 1.500013 months 1.2500 – – – – – – –15 months 1.3000 – – – – – – –18 months 1.4000 – – – – – – –2 years 1.5000 1.1500 1.1000 0.0100 0.7500 0.4000 0.0100 1.5000
TemenosCaseStudy22
Example of Interest Rate-Setting Matrix (following rate changes in December 2008)
Source:BOS
Continued...
Inmostotherareas,costshavefalleninrelativeterms.ThehighlevelsofautomationandStraightThroughProcessing(STP)achievedwithT24,coupledwiththeeaseofmakingchangestothesystem,meanthatitissimplynotnecessaryforthebanktoincreaseITspendingtothesameextentasothercostsasitgrows.Fullautomation/STP,forexample,hasbeenachievedacrossmanyofthebanksactivities,likefeecharging,creditcheckingandloanauthorisation.
Loan RateITEM Beforeratechange After rate change 2008.11.27 2008.12.23
Short Term <=6Months 5.04 4.86 6monthsto1year(included) 5.58 5.31
Medium – Long Term 1yearto3years(included) 5.67 5.40 3yearsto5years(included) 5.94 5.76 Above5years 6.12 5.94
Individual Education – Followtheoneyearshorttermloanrate Loan regardlessoftheterms
Discount – Determinedbytherediscount floorrateplusmargin
Individual Housing Fund Loan RateITEM Beforeratechange After rate change 2008.11.27 2008.12.23
<= 5 years 3.51 3.33 Above 5 years 4.05 3.87
Bank of Shanghai: G&AexpensesasaPercentageofTotalCosts,2005-2008
Source:BOSAnnualReports
29.1%2005 27.1%
200623.7%2007
18.7%2008
TemenosCaseStudy23
Asafurtherillustration,considerthecostsofbranchexpansion.ExpandingitsbranchnetworkhasbeenanexpensiveexerciseforBankofShanghai.Eachtimeitopensanewbranch,itneeds
tolocatethebranch,rentthelocation,fititout,hirethestafftorunit,advertise,etc.However,theITcostsassociatedwithopeninganewbranchareminimal.Whereasunderthelegacysystem,significantmodificationwouldhavebeenneededtoaddanewbranchtothevariousdisparatesystems,thereexistsafunctioninT24toaddanewbranchandtheoperationtakeslessthananhourtoconfigure.Moreover,whilethelegacysystemrequiredeachbranchtohaveatleastoneserver,thisisnotnecessarywiththeT24architecture–itisjustamatterofaddingmoretraffictotheexistinginfrastructure,allowingthebanktoleverageitsIThardwareinvestments.
In2008,BankofShanghaigrewitsoperatingincomeby28%.Itisaddingaround700,000newcorporateandretailcustomerseveryyear.Itisundergoingasignificantexpansionprogramme(in2008,itopenedupoperationsinTianjingandChengdu).Yet,in2008,itaddedonly68newITstaff(internalandexternal)anditsratioofITtofulltimeemployeesstoodatjust4.97%.WeestimateitsratioofITcoststototalcoststobearoundthesamelevel–at4.8%,translatingintoanITcosttoincomeratioof2.0%.Toputthesefiguresincontext,thebank’sIT/TotalCostandIT/Incomeratiosare,respectively,71%and82%belowtheaverageforEuropeanretailbanks27.
Significantly Lower IT Spending
71%lowerBOS’ratioofITcoststototalcostscomparedtoEuropeanretailbanks
82%lowerBOS’ratioofITcoststoincomecomparedtoEuropeanretailbanks
44%lowerBOS’ratioofITcosttototalassetscomparedtootherChinesebanks
Sources
27 ThesourceofITspendingratiosforEuropeanretailbanksisBostonConsultingGroup,IT Performance in the European Banking Industry, BCG’s sixth annual IT Cost Benchmarking Study,June2009.
Bank of Shanghai’s IT Cost Metrics Compared to European Retail Banks
Source:BOS,BCG
IT Cost to Income
IT Cost to Op. Cost
IT Cost to FTE
IT Cost to Total Assets
2%
5%
EUR2,650
5bps
9%
14%
EUR20,000
23bps
Bank of Shanghai European Banks
TemenosCaseStudy24
IT Spending Effectiveness: SplitofITSpendingbyMaintenanceandEnhancements,BankofShanghaivs.DomesticPeers
Enhancements40%
Source:Celent,BOS
ComparingBankofShanghai’sITefficiencyagainstdomesticpeersismoredifficultsince,toourknowledge,nocomprehensivebenchmarkinghasbeenperformed.Nonetheless,usingdatafromCelentandtheCRBC,wecalculatethat,onaverage,Chinesebanks’ITcostspertotalassetsis9basispoints28.WhilethiscomparesfavourablywithEuropeanbanks29,theratioforBankofShanghaiis5basispoints–thatis,44%lowerthantheaveragefordomesticbanks.Furthermore,comparedtodomesticpeers,BOS’ratioofG&Acoststototaloperatingcostsisalso20%lower–alsopointingtolowerrelativeinfrastructureandITspending.
Certainly,BankofShanghai’soverallcosttoincomeratioismateriallybelowbothdomesticandinternationalpeersandlowerITspendingwouldseemtobeasignificantsourceofthedifferential.Comparedtotheaverageforthetop1000banks,BOS’costtoincomeratiois55%lower30;comparedtotheaverageforEuropeanretailbanks,BOS’cost/incomeis41%lower31;and,comparedtodomesticpeers,itscosttoincomeis15%lower.
WhatisclearalsoisthatthelowerrelativeITspendingatBankofShanghaidoesnotreflectlowerrelativespendingonITenhancements;instead,itreflectstheinverse.BecauseBOSrunsanintegrated,highlyparameterisedsystemthatabsorbsmuchlowermaintenancespendthanBOS’legacysystemorthesystemsrunbypeers,inrelativetermsBOSisabletoallocate60%moreofitsITbudgettowardsnewITspending/enhancementsthanitspeers.Effectively,thismeansthatthebankcanspendarelativelymuchloweramountonITyetatthesamespendarelativelymuchhigheramountonITenhancements.
Cost to Income Ratio:BankofShanghaivs.DomesticPeers
35%BOS
59%BHB
40%NCB
40%BoCOM
44%WUC
43%CMBC 41%
HB 37%CMB
37%SPDB
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Cost to Income Ratio:BankofShanghaivs.InternationalPeers
57%EST
35%BOS
66%BCP
53%RFF
77%AXA
54%PIR
64%BOT
49%MB 43%
AIB
79%ICICI
Source:Annualreports,BankerDatabase,Reuters,variousbrokerreports
Sources
28DatafortotalbankassetsinChinacomesfromthe2008CBRCannualreport.DataforaggregatebankspendingonIT comes from Celent, IT spending in the Chinese Banking Industry,December2009.
29 AccordingtotheBCGreport,Renewing Core Banking IT Systems: Open-Heart Surgery for European BanksfromMay2006,Europeanbanks’ITcostspertotalassetsis23bps.
30SourceThe Banker–top1000banks2009.31 BostonConsultingGroup,IT Performance in the European Banking Industry, BCG’s sixth annual IT Cost
Benchmarking Study,June2009.
55%lowerBOS’cost/incomerelativetoaveragefortop1000banks
Maintenance 60%
ChineseBanks BOS
Enhancements65%
Maintenance 35%
TemenosCaseStudy25
Sources
32 SourceforNPLsforthewholemarketisCBRC.Formoredetailsonthepeergroup,pleaseseeappendix1.
“T24 has brought us complete and real-time data, which clearly has big implications for our ability to manage risk, but also for the quality and timeliness of the information that management uses for day-to-day decision making.”Mr.Jiang-VicePresident-BankofShanghai
Risk, Compliance And Management Effectiveness
BeforeT24,BankofShanghaihadaseparateriskmanagementsystem,whichmadeitextremelydifficulttomanageriskeffectively.Forinstance,therewerelags.Undertheoldsystem,
itwasimpossibleforexampletopreventatransactionfrombeingexecutedwhenacustomerhadexceededhisorhercreditlimit,sincelimitscouldnotbequeriedinasufficientlyshortspaceoftime.WithT24,suchatransactioncouldnotbeexecutedand,clearly,giventhehighprobabilitythatsupra-limitborrowingwillbecomedelinquentandultimatelyneedtobeimpaired,thisishelpingBOStoreduceitslevelofNon-PerformingLoans(NPLs).
Withtheoldsystem’saccount-centricity,creditwasgrantedonthebasisofaccounts,notindividuals.Itwasfeasibleundertheoldsystem,forexample,foracustomertohavetwoloanaccounts,onepaid-upandoneinseriousarrears,butbeabletosecuremorecredit.Similarly,itwaspossibleforacustomer,byhavingmorethanoneaccount,toachievealevelofcreditgreaterthanwouldhavebeengrantedonthebasisofacompleteassessmentofhisorhercircumstances.SinceT24cangiveBOSthiscompleteviewofitscustomers–theirtotalborrowings,theirrepaymenthistory,etc–BankofShanghaiisabletopriceandallocatecreditmoreeffectivelythaninthepast,alsohelpingtoreduceitslevelofNPLs.
BankofShanghai’slevelofNPLshasfallencontinuouslysince2006.In2006,BOS’levelofNPLswas3.6%versus3.4%forthepeergroup.Bytheendof2008,BOS’levelofNPLswas2.2%comparedto2.3%forthepeergroupand2.4%forthebankingsectorasawhole32.Withinthepeergroup,thelevelofNPLsamongotherCityCommercialBankswas2.8%.
NotonlydoesT24providebetterqualityandmoretimelyinformationformanagingriskandcustomerrelationships,italsohelpsmanagementwithbroaderdecision-making.Inadditiontoacompleteviewofriskandcustomerrelationships,T24givesBOSacompleteviewofproduct,employeeandbranchperformanceandthebankmakesuseofadatawarehousetooltocarryoutmoredetailedanalysisonthisdata.Furthermore,thedataisnotjustmorecomprehensive,butmoretimelytoo.Takefinancialreporting,undertheoldsystem,itwasnotpossibletoaccrueinterestandmanagementwasonlyabletoviewacompleteincomestatementonceaquarter.WithT24,managementhasaccesstoadailyprofitandlossstatement.
Conclusions
TemenosCaseStudy26
AboomingeconomyandmassurbanmigrationarecreatingtheconditionsforacceleratedgrowthintheChinesebankingsector.However,theChinesegovernmentissimultaneously
deregulatingandinternationalisingthemarketandsocompetitionisintensifying.Thus,despitethescaleoftheopportunity,itwillonlybethemostagileplayersthattrulycapitaliseontheopportunity–thosethatcangeneratelong-lastingandself-sustaininggrowthbasedonstrongclientrelationships,ahigh-qualityportfolioofassetsandtherealisationofscaleeconomies.
Recognisingboththeopportunityandthepreconditionstoachievethatopportunity,BankofShanghai(BOS)launchedastrategyforgrowththatnecessitatedthereplacementofitscorebankingsystem.In2002,itunderwentaselectionprocessthatevaluatedtheoptionofaninternalbuildalongsidetheoptionoftakingapackagedsolutionfromaninternationalorlocalvendor.Intheend,thebank’sdesiretoadoptinternationalbestpracticessawitcomedowninfavourofaninternationalsolutionand,amongthesystemsconsidered,T24fromTemenosemergedastheclearpreferencebasedoncustomerreferences,levelofintegration,implementationrecord,functionalcoverageandstrengthofbusinessprocesses.
BankofShanghaiisthelargestbankinChinatohavegonelivewithaninternationalcorebankingsolution.Theprojectwasstartedin2004andT24wentliveinthecorporatebankin2006andintheretailbankin2008.Acompleximplementationinvolvinghighlevelsoflocalisationandprocessreengineering,theprojectwasdeliveredfundamentallyontimeandonbudget.
Sincegoinglive,T24hasactedasanimportantcatalystforBankofShanghai’sstrongrecentabsoluteandrelativefinancialperformance.
Byaffordingasingleviewofthecustomer,T24hasmadepossiblesignificantimprovementsincustomerservice.Customersreceiveseamlesscustomerserviceacrossallchannels,fasterdecisions(mortgageapprovals,forexample,aregiven75%fasterthanbefore)andadifferentiatedexperience.Overall,bettercustomerserviceistranslatingintofastergrowth:in2008,BankofShanghaigrewloansat18%comparedtothepeergroupaverageof16%anditgrewdepositsat21%versusthepeeraverageof19%.Wealsoestimatethatthebankgrewrevenuepercustomerbyaround16%.
T24hasdramaticallyreducedthecostandtimetomarketfornewproducts.Developmenttimeshavebeenreducedbybetween60%to75%anddevelopmentcostsbyevenmore.BOSislaunchinganewproductonaverageevery1to2weeksandmanyoftheseproductsaretrulypioneering–BOSwasthefirstbankinChina,forexample,tolaunchajointretailandcorporatecard.Inthelasttwoyears,thebankhasgrownfee-basedincomeatacompoundrateof59%,toalevelthatis1.6xtheaverageforCityCommercialBanksanditsNetInterestMargin,forthefirsttimein2008,overtookthelevelofpeers.
T24,asanintegratedandrobustsolution,hasallowedthebanktoextractITeconomiesofscaleasithasgrown.In2008,BankofShanghaigrewitsoperatingincomeby28%andaddedaround700,000newcorporateandretailcustomersyetitsITheadcountincreasedbyonly68people.WeestimateBOS’ratioofITcoststototalcoststobearound4.8%,translatingintoanITcosttoincomeratioof2.0%.Toputthesefiguresincontext,thebank’sIT/TotalCostandIT/Incomeratiosare,respectively,71%and82%belowtheaverageforEuropeanretailbanks.Furthermore,BOS’ratioofITcosttototalassetsis44%lowerthanotherChinesebanks.
Byofferingup-to-date,integratedandcompleteinformation,T24hasconsiderablyimprovedriskgovernanceandmanagementdecision-making.Non-PerformingLoans(NPLs),forinstance,havefallencontinuouslysince2006.Bytheendof2008,BOS’levelofNPLswas2.2%comparedto2.3%forthepeergroupand2.4%fortheChinesebankingsectorasawhole.
In2008,BankofShanghai’sReturnonCapitalwas125%higherthantheaverageforthetop1000banksand15%higherthandomesticpeers.
TemenosCaseStudy27
Appendix I: Peer group for benchmarking
Abbreviation BankName JointStock(JSC)or Website CityCommercialBank(CCB)?
BON BankofNanjing CCB www.njcb.com.cn CB CiticBank JSC www.citic.com/wps/portal CMB ChinaMerchantsBank JSC http://english.cmbchina.com CMBC ChinaMinshengBankingCorp. JSC www.cmbc.com.cn HB HuaxiaBank JSC www.hxb.com.cn IB IndustrialBank JSC www.industrial-bank.com BoCOM BankofCommunications JSC www.bankcomm.com BOB BankofBeijing CCB www.bankofbeijing.com.cn NCB NingboCommercialBank CCB www.nbcb.cn CEB ChinaEverbrightBank JSC www.everbright165.com.hk SPDB ShanghaiPudongDevelopmentBank JSC www.spdb.com.cn SDB ShenzhenDevelopmentBank JSC www.sdb.com.cn GDB GuangdongDevelopmentBank JSC www.gdb.com.cn DCB DongguanCityCommercialBank CCB www.dongguanbank.cn BHB BohaiBank CCB www.cbhb.com.cn NB NanchangBank CCB WUC WuhanUrbanCommercialBank CCB www.whcbank.com QCC QingdaoCityCommercialBank CCB www.qdccb.com SRCB ShanghaiRuralCommercialBank RCB www.shrcb.com/rxcms/cn/ DCC DalianCityCommercialBank CCB ACB AnshanCommercialBank CCB www.asccbank.net
Appendices
TemenosCaseStudy28
Appendix II : Abbreviations used in the report
CAGR CompoundAnnualGrowthRate CAR CapitalAdequacyRatio NIM NetInterestMargin RCB RuralCommercialBank SMEs Small&Mid-sizeEnterprises GDP GrossDomesticProduct IPO InitialPublicOffering CI CosttoIncomeRatio G&A GeneralandAdministrative SOCB StateOwnedCommercialBank WTO WorldTradeOrganisation RMB Renminibi FX ForeignExchange NPL NonPerformingLoan JSCB JointStockCommercialBanks ENB ElectronicNationalBonds STP StraightThroughProcessing G&A General&AdministrativeCost CBRC ChinaBankingRegulatoryCommission EST ErsteBank BCP BancoComercialPortuguês RFF RaiffeisenBank BCO BancoCooperativa PIR PiraeusBank AIB AlliedIrishBank ICICI ICICIBank BOT BankofTaiwan MB Maybank AXA AXABankEurope
Appendices
TemenosCaseStudy29
AuthorBenRobinsonisDirectorofStrategicPlanningatTemenos,basedintheGenevaHeadquarters.Hecanbecontactedbyemailatbrobinson@temenos.com
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About TemenosFoundedin1993andlistedontheSwissStockExchange(SIX:TEMN),TemenosGroupAGisaglobalproviderofbankingsoftwaresystemsintheRetail,Corporate&Correspondent,Universal,Private,IslamicandMicrofinance&Communitybankingmarkets.HeadquarteredinGenevawith56officesworldwide,Temenosservesover1000customersinmorethan125countries.Temenos’softwareproductsprovideadvancedtechnologyandrichfunctionality,incorporatingbestpracticeprocessesthatleverageTemenos’experienceinover600implementationsaroundtheglobe.Temenos’advancedandautomatedimplementationapproach,providedbyitsstrongClientServicesorganisation,ensuresefficientandlow-riskcorebankingplatformmigrations.TemenosistopoftheIBSSalesLeagueTable2009;winnereveryyearsinceitslaunchoftheBestCoreBankingProductinBankingTechnologymagazine’sReaders’ChoiceAwardsandranks26thintheAmericanBankertop100FinTechcompanies.Temenoscustomersareproventobemoreprofitablethantheirpeers:datafromTheBanker–top1000banksshowsthatTemenos’customersenjoya54%higherreturnonassets,a62%higherreturnoncapitalandacost/incomeratiothatis7.2pointslowerthannon-Temenoscustomers.
Disclaimer - TemenosThiscasestudyisbasedonselectedinformationavailableinthepublicdomainandprovidedbythebank,uponwhichwehaveplacedreasonablereliance.InarrivingatourconclusionsregardingBankofShanghai’sperformancecomparedtodomesticpeers,wehaveanalysedthedatafrommorethan20JointStockBanksandCityCommercialBanks,whomwejudgedtohavesimilarabsoluteassetbasesand,accordingly,whoseperformancewebelieveisdirectlycomparable.
Disclaimer - Bank of ShanghaiThecasestudydocumentshavebeenprovidedforinformationpurposesonlyandareonlysubjecttointernalcommunicationanddiscussion.
AlltheinformationconcerningBankofShanghai(theBank)inthedocumentisobtainedfromitsannualfinancialreports.Thebankdoesnotguarantee,andacceptsnolegalliabilitywhatsoeverarisingfromorconnectedto,theaccuracy,reliability,orcompletenessofanymaterialcontainedinthedocuments.
Insomecasesthematerialmayincorporateorsummariseviews,standardsorrecommendationsofthirdparties.Suchmaterialisassembledingoodfaith,butdoesnotnecessarilyreflecttheconsideredviewsoftheBank.
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