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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