UCB Approach to New Markets

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UCB Approach to New Markets

• World Bank Group Housing Finance Conference
• Washington DC March 15-17, 2006

Jean-Christophe
Steven
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Contents

• UCB Presentation
• Building new markets
• Todays new (emerging) markets
• An opportunity for UCB
• Two case studies Turkey and Morocco
• Challenges UCB faces
• Conclusions

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1. UCB Presentation
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A Housing Finance Specialist

• Founded in the 1951 post-WW2 France under
  reconstruction
• to help the process by financing main, secondary
  or investment residences, UCB is a
• wholly-owned subsidiary of the BNP Paribas Group
  and the Housing Finance business line flagship of
  BNP Paribas International Retail Financial
  Services
• UCB markets its products B2B through a network of
  business referral partners (e.g. Brokers,
  Realtors, Construction Companies and Property
  Developers)

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International development

• UCB is the only French Housing Finance specialist
  with an international network, incepted in
  1986...
• and presently comprising 8 units in France,
  Spain, Italy, Portugal, Greece, Norway, the
  Netherlands and Belgium
• We open UCB Switzerland in June 06 and 5 other
  projects are taking us, inter alia, to Turkey and
  Morocco .

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Global Data Bank

• 55,000 new customers per year
• Euro 10.8 Bn new loans in 2005 (34.1 over 04)
• As at Dec 2005, Euro 27.8 Bn loans outstanding
  (23.6 over 04)
• 2 500 employees

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2. Building new markets
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3 Development Phases

• 1951 France as a country under reconstruction
• French State sponsored market organisation
• Dominant State-owned players
• Subsequent gradual liberalization
• 1989 France as a fully liberalized country in an
  integrating Europe.
• UCB internationalizes itself, with low growth at
  home
• 1989 preparation for first subsidiary in Spain
• followed by Italy (1989), Portugal (1999), etc,
  etc.
• 2002 France in the Global Economy
• Core European network consolidation (The
  Netherlands, Norway, Greece, Belgium, Switzerland
  and Germany)
• with assessment of emerging markets in Eastern
  Europe and the South Med.

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Methodology of expansion

• No preset roll-out model
• Draw on past experiences to adapt to new places
• Strongly support new businesses
• Operational autonomy of mature subsidiaries
• Cross-fertilisation between UCB businesses
  wherever beneficial (IT, marketing, process)
• Leverage on BNP Paribas Group international
  presence
• Models toolkit
• Northern Europe Model (Brokers referrals)
• Southern Europe Model (Realtors referrals)
• Post-war France Model (Construction Companies
  referral)
• Achieve a realistic and sustainable local market
  share depending on market dynamics (Do not
  overreach)

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New markets features (1)

• Macroeconomic Imbalances
• Currency volatility challenges foreign investors
• High Interest rates
• Limited primary liquidity and almost no secondary
• Significant budget deficit ratios
• require Multilateral Financial Institutions to
  assist in addressing the situation with
  suggestions for
• More flexible exchange rate regimes
• New practices in financial markets
• New frameworks, laws and regulations
• Monetary policies and inflation targeting
• and to look for the contribution of Housing
  Finance specialists

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New markets features (2)

• Socioeconomic Imbalances such as
• Dwellings deficits
• Qualitative in Eastern Europe
• Quantitative and Qualitative in the South Med Rim
• Housing Loans Limitations
• Housing Loans with shorter term
• Limited Loan Products range
• Low mortgage debt ratio between 1 and 15 (1
  in Turkey, 4 in Poland, 8 in Morocco, 11 in
  Jordan, 12 in China)
• Strong demographic growth and a very young
  population
• Fast paced and recent urbanization, at the
  expense of space control (Currently 40 of less
  developed countries residents live in urban
  areas. It is expected that 60 of the world
  population will be urban by 2030, and that most
  urban growth will occur in less developed
  countries.)

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3. Todays new (emerging) markets
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UCB Three Criteria Model (1)

• We regularly run a model blending about 200
  indicators to track
• Attractiveness, with respect to
• size
• profitability
• growth
• Accessibility in terms of
• refinancing
• costs of starting up
• synergies with the BNP Paribas Group
• competitive environment
• specificities of the country
• Risks, the cornerstone assessment of
• regulatory risk
• solvency risk
• market risk
• country risk

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UCB Three Criteria Model (2)

• In-depth Reviews and Country Committees ensue
• To sort countries, as per todays data,
  according to 4 categories
• Priority countries
• Accessible countries
• Attractive countries
• Country to further assess
• Dynamic forecasts are also run to envisage future
  trends
• And this process can change countries status

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UCB Three Criteria Model (3)

• Our housing finance model is overall providing
  positive views for emerging markets. Worth of
  note
• Hungary
• A slowing down of the loans growth, albeit at a
  high level (30 a year vs 80 over 2000-2004
  period)
• Stable margins at high level
• Development of refinancing by mortgage bonds
  (mainly covered bonds)
• Russia
• Very strong loans growth (about 85 a year
  between 2000 and 2004)
• supported by the Government that should
  implement in 2006 a support package for our
  industry

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UCB Three Criteria Model (4)

• Algeria
• A relatively small market compared to its
  neighbours (Morocco, Egypt, Tunisia) but a very
  important potential.
• Improvement of market conditions new banking law
  (2005), computerization of land registries,
  mortgage finance trainings for the main market
  players.
• India
• Growth of outstanding loans remains at a high
  level (40 a year between 2000 and 2004,
  outstanding as at 2004 US 26 Bn)
• A favourable legal environment
• Decrease in interest rates (from 15 in 1999 to
  9 in 2005)

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4. An opportunity for UCB
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Why we have to be there?

• Important structural reforms happen now in many
  emerging markets
• We can provide to local regulators our views on
  practical solutions for issues encountered in
  many different countries
• We want to share with local partners best
  practices and skills
• Win-win strategy locally
• Gradual integration strategy globally
• Also, risks being higher we can enjoy
• Higher margins and
• Synergies with the International Retail Banking
  and Financial Services core business lines of BNP
  Paribas

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Optimism about the future

• Given its linkages to land, construction, and
  labour markets, housing finance is key to
  economic growth and at the forefront of
  Governmental Policies and Planning everywhere.
• Mortgage markets have grown at very strong annual
  rates and construction activity is booming with
  no signs of crash landing
• Emerging countries offer significant
  opportunities for the following reasons
• Falling interest rates, tax incentives and
  healthy property prices have increased the
  affordability of housing loans and the desire to
  be part of the virtuous circle.
• Increasing incomes will lead to increased demand
  for housing finance in urban areas.
• Rapid economic growth has led to urbanisation
  causing the demand for housing to soar.

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How to enter these markets?

• Carefully review conclusions of our internal
  Three Criteria Model Turkey and Morocco stood
  out as desirable countries.
• Respond to BNP Paribas local partners requests
  for UCB presence, TEB in Turkey and BMCI in
  Morocco, to provide our intermediaries marketing
  expertise.
• Take strategic decisions about what categories of
  intermediaries to market.
• Meet representatives of the chosen target
  intermediaries in all key cities

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Turkey (1)

• A young and dynamic population of over 70
  million, 65 less than 30 years old
• A fast developing country with an average growth
  rate of 7.5 per year in 2002-2004
• A macroeconomic stabilization with a virtuous
  circle of
• Lowering inflation expectation (7,9 in 2005)
• And falling real interest rates ( 14)
• Many Banks push into mortgage finance
• Most middle and low income families cannot
  benefit from housing loans because they are still
  too costly

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Turkey (2)

• The developing strategic shareholding pact with
  TEB provides UCB with a gateway into one of the
  largest countries in Europe population-wise
• at a time when Turkey has just embarked in a
  convergence scenario with the EU supported by
  strong performance in terms of growth, inflation
  and interest rates.
• Moreover a new Housing Finance System law
  will, within months, accelerate the expansion of
  a mortgage financing market currently taking off
  briskly.

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Morocco (1)

• Macroeconomic stability with
• Low inflation average 1,5 for the period
  1999-2004
• The external current account has been in surplus
  since 2001
• Growth 5,5 in 2003 and 4,2 in 2004
• Important lack of housing units
• In 2005, the deficit is stable at 1 240 000
  dwellings
• Underdeveloped Realtors sector
• A dynamic housing loans sector
• Decrease in interest rates (from 12,5 to 7,5)
• Housing loans outstanding reached 8 of GDP in
  2004 against 3 in 1995
• With a 25 growth in outstanding in 2005 (5,4 Bn
  euros), the market is already in a booming trend.
  But the potential of development remains
  important, since only 20 of the population is
  holding a bank account.

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Morocco (2)

• UCB approaches Morocco as a springboard for the
  Maghreb, a region comparable to Turkey
  population-wise.
• Due to its economic stability (controlled
  inflation, low interest rates) and its tight
  links with Europe
• Morocco is a neighbour country with good
  mortgage finance potential
• through a construction companies/ developers
  referrals marketing strategy.

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Difficulties in emerging countries challenges
UCB has to face (1)

• Underdeveloped financial systems
• Lack of long term debts instruments and other
  funding issues
• Securitization of mortgages proves difficult
• A still unstable legal environment
• Land tenure, property rights and the legal
  process can be significant impediments

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Difficulties in emerging countries challenges
UCB has to face (2)

• A limited access to housing finance
• Inadequate supply of trained professionals
• New products framework difficulties (PEL in
  Morocco)
• Maturity of loans is often too short
• Lack of sound information on the actual exposure
  of individuals to debt
• Crisis triggers and early warning indicators
• Economic crisis unemployment, lower housing
  values, external shock
• Delays in coming up with new prudential lending
  standards and regulations
• Ineffective foreclosure (delays, appeals, adverse
  judiciary)
• Late payment and default statistics

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Conclusions

• The current period appears to be a historic high
  point in the Housing Finance industry history
• UCB and its parent, BNP Paribas, recognize the
  many opportunities offered by these conditions
  and
• will make increasingly available its expertise
  and financial capacity to our industry.
• especially in the Emerging Markets.
• Thank You
  For You Attention