SME Programme Lending Overview Group Best Practices

1
SME Programme LendingOverview Group Best
Practices Key Challenges

• SME Conference
• Lahore, Pakistan - May 2005
• David Yong
• GRM Consumer Programme Lending

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Agenda

• Introduction
• Scope
• Overview major ABN AMRO SME businesses
• Business Models
• Credit Process Product Programmes
• Portfolio MIS
• Use of scoring
• Key Challenges

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ABN AMRO Pakistan

• 1948 First foreign bank in Pakistan
• 1993 Expansion of branch network (7 branches in
  3 cities)
• 1998 Introduction LCY deposits penetration
  into Affluent segment
• 1999 Introduction Personal Loans Mortgages
• 2002 Launch Commercial Banking focusing on
  Mid-sized Corporates
• 2005 Launch Credit Cards

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History of ABN AMRO (1)

• On 29 March 1824, King Willem I issued a royal
  decree creating the Nederlandsche
  Handel-Maatschappij (NHM) with the aim of
  reviving trade between the Netherlands and the
  Dutch East Indies.

• In 1964, NHM merged with De Twentsche Bank to
  form Algemene Bank Nederland (ABN) while
  Amsterdamsche Bank and Rotterdamsche Bank joined
  to become Amsterdam-Rotterdam (Amro) Bank.
• In 1991, these two banks merged as ABN AMRO.

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ABN AMRO today...
Strong Balance Sheet

• conducts banking, fund management insurance.
• ranks 11th in Europe and 18th in the world based
  on total assets.
• has over 3,000 branches in more than 60
  countries, a staff of about 97,000 FTEs and total
  assets of EUR 742.9 billion (as at 31 March
  2005).
• is listed on the Euronext and the New York Stock
  Exchange.

Global Resources
EUR (bln) Total assets 742.9 Group
capital 35.6 Risk weighted assets
245.6
Solid Credit Rating
Employees worldwide 97,000 Branches and
offices 3,000 Countries/territories
60
Well- Positioned Bank

Long-Term Moodys Aa3 Standard Poor
AA- Fitch IBCA AA-
Ranking Total assets - Worldwide 18 -
European 11
as at 31 March 2005 The Banker, July
2004
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Scope SME characteristics segmentation

• Backbone of economy
• Family owned/dependent (informal)
• Various types of legal entity
• Importance of personal relationship with client
• Quality of financials
• Understated revenues for taxation purposes
• Level of Owners commitment and equity
• Part of (small) community network
• Influential community

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Target market definitions across our sample
varied widely across markets and within markets
Specialist segmentations observed
Main SB segment definitionby geography
Specific segments served according to web-site
(e.g. 70 of the 23 banks had a defined
Agriculture offer)
Average
2.3
5.3
7.9
Franchises
2.5
4.2
6.0
Minorities
0.7
1.6
2.9
1.0
2.9
Non-profit
7.5
1.2
2.8
4.3
Agriculture
4
0
2
6
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Cut-off turnover (?MM)
Mercer Oliver Wyman
Note n 32 banks
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Players have positioned themselves as having a
few products in each family simple and
standard
Observations
Simplicity of external offering(Products per
family according to web-site)

• Often standardised core offer with segment
  variation injected via the communications mix
• However, most players interviewed said they had
  many more products internally
• Poor record of product management and
  rationalisation
• Most players applied a variety of standard
  customer insight tools into SB product design
• Market sizing and projected profit pools research
• Competitive research
• Mystery shopping
• Networking with local influencers or trade
  associations
• Best practices would be banks that conducted
  SB-specific quantitative research around needs
  More specialist products such as leasing,
  factoring normally outsourced to sister companies
• Only a few offered external value-added products
• e.g. advisory services

prods
Mercer Oliver Wyman
n 18 banks
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Overview

• Home Market BUs (NL, US and Brazil) adopted
  Product Programmes for SMEs
• Identify potential for further migration (NL
  Brazil)
• Products across markets are similar and
  traditional
• Emerging markets cautious start by other BUs
  (India, Indonesia, Pakistan Taiwan)
• Knowledge-sharing across the Group
• Cut-off point program lending non- program
  lending to be determined per market
• Overseeing 17 Product Programmes with ENR of EUR
  2,8 Billion, with transition portfolios

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Overview - Total Portfolio (December 2004)

• Total portfolio EUR 2,8 Billion (Dec 2004)
• Largest portfolio BU US with USD 1,3 Billion
• Portfolio consist of traditional and simple
  products (4Q2004 84)
• Rapid growth in NL (organic) and Brazil (organic
  acquisition)
• Transition portfolio BU NL earmarked gtEUR 2,2
  Billion
• Cautious start in India Indonesia
• Development of plans for VGPB Business Owners in
  NGM Asia

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Business models

• Domestic positioning Home Market BUs
• large client base
• traditional domestic standardised products
• relatively larger distribution network
• Greenfields International Network
• start from (almost) zero
• competitive edge
• limited distribution network
• limited reliable data for credit assessment

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There are many ways to create growth in Small
Business banking
Information-based Strategy
Return to Local Intimacy

• Aus/NZ Bank had lost Small Business (SB) share
  after attempting to build low-cost remote channel
  model
• Re-launched a named local point of contact (RM or
  branch manager, direct dial number) with letter
  campaign and outbound follow-up
• Saw 50 increase in customer satisfaction, 4-5
  points of share gain and now back in top 2 share
  position, in less than 18 months

• Capital One entered SB market in 99-00 applying
  IBS techniques
• Combined marketing and risk analytics, with
  predictive modelling to target asset-based
  products with a direct marketing model
• 39 3-yr CAGR in asset growth, now 2 in SB cards
  and 3 in SBA loan origination

Multiple Business Model Focus
Exploit Retail Branch Coverage

• HBOSs merger had given it a strong SB business
  with the BoS franchise but locked into small
  branch footprint
• Rapidly hired network of RMs to tackle the
  1-10MM turnover segment hunter force to
  source acquisitions and doubled UK share from
  3 to 6
• Now re-branding 400 branches (out of 800) in
  England in 2005 and creating in-branch SB
  specialists to exploit full retail presence and
  go after 0-1MM businesses

• US bank had reduced branch network and lapsed in
  service quality suffering SB attrition rates of
  30
• Segmented business into 3 distinct propositions
  national direct, affluent/upper-end SB and
  branch-based micro-SB, combining
  personal/business accounts
• Expanded SB franchise beyond branch footprint,
  now in Top 3 in US SB lenders. Grew profits at
  30 CAGR over 5 years, vs. bank growth of 20 CAGR

Mercer Oliver Wyman
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Credit Process Commercial versus Consumer/SME
Commercial Loans Low volume Large
heterogeneous Deal-based Audited financial
statements Account management Review
loan-by-loan Senior managers approve
large/complex loans
Consumer SME Loans High volume Small
heterogeneous Volume-based Limited consumer
financial data Portfolio management by
statistics Senior managers approve credit
product programmes
Transaction characteristics Approval
process Credit data Handling and
checking Hierarchy of approval
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Traditional deal-based underwriting dont work in
high volume lending
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Portfolio Management is in the core of Risk
Management function

• Credit Cycle

Product Planning
Write-Off
Management Information Systems
Portfolio Management
Collections
Credit Acquisition
Risk Management
Account Maintenance
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Risk Management -Programme Lending features

• Standardised and simple products
• Critical mass/scale
• Risk reward balance
• Predictability
• Factory - style
• Management by exceptions

Portfolio Management done through approved
Product Programmes
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What is a Product Programme?

• A standardized set of rules of credit extension
  for a group of customer with similar
  characteristics or product needs
• A sign-off on a Product Program is considered an
  approval of the complete risk/reward
  characteristics of the product and the credit
  cycle process
• Demonstrates that portfolio performance will be
  predictable in terms of revenues, delinquencies,
  and losses

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The Product Program contains ...

• Product Description
• Target Market
• Economic and Competitive Environment
• Eligibility Criteria (Terms and Conditions)
• Account Initiation
• Account Maintenance
• Collection and Write-Off Policy
• Treasury, Funding, and Pricing Considerations
• Support Systems and MIS reports
• Product Profitability and Stress Testing

The Product Programme process is strongly
supported through MIS
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Importance of MIS

• Continuously process and transforms data into
  information, which will be used in the decision
  making process directed towards optimizing
  results
• Risk-Return Trade-Off
• Serves as a base for effective credit cycle and
  portfolio management controlling risks and
  assessing opportunities

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Example I - Portfolio Performance
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Programme Lending benefits Basel 2 Retail

• An incentive to place as much of the SME
  portfolio into a standardised Program-Lending
  format, as is practical prudent. (GRM limit EUR
  5MM)
• Whilst the advanced approach has distinct
  advantages, the standardised approach is also
  beneficial with risk weights at 75.
• Both Capital relief and cost efficiencies can be
  expected from standardisation.
• As more SME portfolios become standardised to
  take advantage of Basel II, the product will in
  turn become easier to securitize, so the product
  will become more attractive to banks, who may
  choose to keep it on or off balance sheet based
  on capital need.

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Implementing Program Lending faces challenges

• Sponsorship of Senior Management and Line support
  
• Available credit data to assess clients and
  prospects
• Human resource and Organization issues
• Provide adequate and on-going training in credit
  cycle management and program lending
• Ensure an organization capable of meeting the
  need for greater coordination and teamwork
• Redesign of business process
• Identify a project team of individuals who
  represent functional areas of the credit cycle
• Be ready to supplement internal resources with
  external consultants

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Implementing Programme Lending faces challenges
(continued)

• Sufficient IT systems and data base resource
• Resolve gaps on data source, data quality, data
  integration and data usage
• Ensure an automated front-end Loan Origination
  System (LOS) and Collection System in place
• Effective and consistent MIS reporting
• Establish one single standard or common language
  reporting system
• Provide end-to-end MIS consistent with Product
  Program definition
• Ensure that the MIS has the ability to peel the
  onion or disaggregate performance data at
  various level of detail

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Implementing Program Lending faces challenges
(continued)

• Implementation of scoring methods
• Scoring systems make sense only for high volume
  business
• Application Scoring
• increase underwriting process efficiency
• improve portfolio quality thru statistical
  control
• Behaviour Scoring
• increase profitable customer relationship

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Scoring tries to evaluate who is the best risk?
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Different score cards for different purposes

• Internal Application Risk Scorecard
• Based on applicants past performance
• New accounts
• Internal Behaviour Risk Scorecard (Behaviour and
  Collections Scoring)
• Existing Business
• Based on account holders past performance
• External Credit Bureau Scorecard
• Based on account holders external credit activity

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How It Works Policy

• Rank All Applications By Default Risk
• Set Cutoff To Achieve Approval Objectives

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Recap - Key challenges

• Senior Management commitment
• Skill-set human resources
• Overhaul of existing credit process
• Investments in IT
• Commence Data collection
• Rationalization of Product Management
• Alignment of service concept to cost/benefit
• Availability of credit data

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Thank you
david.yong_at_nl.abnamro.com