PROJECT: Consumer loans

1
PROJECT Consumer loans

• 30 May 2003

2
Content

• Page
• Market characteristics 3
• SWOT 6
• Value proposition 7
• Product 8
• Product cannibalisation 11
• Business model 12
• General business process 13
• Mitigation of risks 14
• IT infrastructure required 15
• Business case 16
• Project 17

3
Market characteristics

• Future rise of household incomes in between of
  3-5 p.a. in absolute numbers
  yearly by CZK 40-60 bil.
• Highly dynamic consumer loan market with
  unlimited potential
• Low demand elasticity of interest rates high
  spread of interest rates 7 - 20 p.a.
• Diversification of consumer loan products
• Key competitive advantage processing time
  currently within 24 hours after documents
  submitted
• Standardisation of processes and documentation
• Increasing demand for consumer loans without
  purpose
• Strong marketing support

4
Market characteristics
Costumer loan market dynamics
100 000
90 000
80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
2006
1997
1999
2000
2001
2004
2005
2002
1998
2003
Legend Volume of consumer loans granted Estimate
of the future consumer loan volume
Source bulletin Bankovnictví
5
Market characteristics

• KB
• Products
• individual loan (with purpose, purposeless)
• Credit Garant (financing clients demands without
  mentioning purpose, however secured with real
  estates)
• Consumer loan for real estate financing
• Minimum amount CZK 50 000
• Interest rate starting by 9 (in av. 12-14 )
• Account maintenance fee CZK 80 per month
• Processing fee CZK 800 0,3, max.CZK5 000
• Maximum maturity 6 years (when collateralised by
  real estate - 10 years)
• Processing and approval is mostly performed by
  branches using scoring function

• CESKÁ SPORITELNA
• Products
• Purposeless Cash Loan
• Consumer Loan with purpose required
• Consumer loan for real estate financing
• Minimum amount CZK 20 000
• Interest rate in average 9 - 12
• Account maintenance fee CZK 500 per year
• Processing fee 0,2, min. CZK 400,
  max. CZK 7 000
• Maximum maturity 6 years (with purpose 10 years)
• Processing and approval is performed by branches
  using scoring function

• CSOB
• Products
• CSOB purposeless consumer loan
• CSOB consumer credit with purpose required
• Minimum amount CZK 20 000
• Interest rate in average 12 - 13
• Account Maintenance fee unknown
• Processing fee 1 min. CZK 500, max.
  CZK 3 500
• Maximum maturity 3 years (with purpose 7 years)
• Processing and approval is performed by branches
  using scoring function

CITIBANK Product Citibank individual credit -
purposeless Minimum amount CZK 30 000 Interest
rate starting by 17,2 and high. Account
maintenance fee CZK 89 per month Processing fee
CZK 800 Maximum maturity 5 years Processing in
branches, approval is centralised using scoring
function
RAIFFEISEN BANK Product Quick loan -
purposeless Minimum amount CZK 20 000 Interest
rate starting by 8,8 and high. Account
maintenance fee CZK 80 per month Processing fee
unknown Maximum maturity 5 let Processing in
branches, approval is centralised using scoring
function
GE CAPITAL Product Express loan -
purposeless Minimum amount CZK 30 000 Interest
rate starting by 16,9 Account maintenance
fee CZK 30 per month Processing fee 1, min.
500 Kc Maximum maturity 5 years Processing in
branches, approval is centralised using scoring
function
6
SWOT
Strengths
Weaknesses

• Neglecting market position
• Missing product for client acquisition
• Unskilled branch network
• Low standard of retail front end system

• Risk avers credit process
• Low default rate
• Low interest rates offered

Threats
Opportunities

• Main players aggressive marketing support
• Decreasing processing times
• Lower credit risk requirements
• Ineffective loan process causing loan processing
  problems

• Activation of HVB internal mobile sales forces
  and third parties
• Market dynamics and potential
• Low price elasticity
• Larger product offer

7
Value proposition

• Universal consumer loan products offered to mass
  and upper mass segments
• Processing time guaranteed within 24 hours for
  purposeless loans
• Platform for further diversification within
• Product bundles mortgage consumer loan,
  consumer loan insurance products e.t.c.
• Mobile sales forces simplified product for
  mobile distribution
• Strategic alliances financing housing furniture,
  cars, study trips e.t.c.
• Understanding of consumer loan as client
  acquisition product

8
Product

• We propose two types of consumer loan products
• for private individuals
• Quick purposeless consumer loan
• (Understood as product platform for future
  strategic alliances and product bundles)
• Collateralised consumer loan (mainly by real
  estate)
• (To be used for product bundles with mortgages
  and for specialised purposes of financing)

9
Product
Quick purposeless consumer loan Main
characteristics

• Engagement limits CZK 50.000 - 400.000
• Uncollateralised engagement up to a limit of CZK
  150.000
• No purpose required
• Repayment horizon maximum 4 years
• Margin of uncollateralised loan 8 - 10
• Margin of collateralised loan 4 - 6
• Processing fee 1 of the balance granted
• Account maintenance fee CZK 50 per month
• Decentralised loan analysis and administration by
  branches
• Credit decision within 24 hours
• For risk issues refer to slide No. 14
• including risk margin

10
Product
Collateralised consumer loan (mainly by real
estate) Main characteristics

• Minimum limit of engagement 150.000 CZK
• Purpose of financing required
• Repayment horizon maximum 10 years
• Margin 4 - 6
• Processing fee 1 of the balance granted
• Account maintenance fee CZK 50 per month
• Centralised loan analysis
• Decentralised loan administration by branches
• For risk issues refer to slide No. 14
• including risk margin

11
Product cannibalisation
Usual limit of the credit card
Limited by personal income
without purpose
Credit card
Kontokorent
without purpose
Consumer loan
with specified purpose
intersection
without purpose
Mortgage loan
for real estates
CZK 400.000
CZK 150.000
CZK 50.000
CZK10.000
CZK 25.000
12
Business model
Client administration
Client acquisition
Branches
Branches
- wins clients - provides finance consultancy -
prepares product offer - prepares loan
documentation
- loan proposal finalisation - input into
accounting system - drawing of the consumer
loan - loan maintenance - review of loan cases -
classification proposal
Third parties
- wins clients - provides finance consultancy -
prepares product offer
Consumer loan analysis
- loan proposal finalisation - input into
accounting system - drawing of the consumer loan
Call center
- HELP LINE - INFO LINE - contact external dealer
Internet - web sites
- addresses the client - presents products -
provides interactive application form - selects
external dealer
Internal mobile sales forces
- wins clients - provides finance consultancy -
prepares product offer - prepares loan
documentation
13

General business process
Contractual documentation preparation
Drawing and monitoring
Client acquisition
Loan closure
Data collection
Analysis
Approval
?
?
?
?
?
Loan settlement department
- Loans over 400.000 CZK,- - Shadow zone of
scoring - Special cases (collateralised e.g.)
14
Mitigation of risks

• The risks categories will be mitigated based on
  following pillars
• For credit risk using centralised credit scoring
  function owned by KRM, however accessible by
  branches
• For operational risk using
• Centralised methodology and loan documentation
  templates
• Electronic process control and generating of key
  loan documentation
• Centralised quality management exercised by
  branch network management

15
IT infrastructure required

• IT department propose a front end solution under
  background system in form of mortgage loan module
  fine-tuned for consumer loan needs
• Decentralised data input can be performed
  choosing one of the
  three IT solutions
• Future global decentralised on line data input
  solution
• Intranet branch as on line solution
• Advisory module as batch system solution
• Currently an analysis of IT needs in area of
  consumer loans and cost assessment is
  performed

16
Business case
The high level net present value (NPV)
calculation shows positive result of the
project in amount of CZK 99 548 tsd. considering
4 years projection

• Discounted cash flow calculation is
  based on following assumptions
• Discount rate was calculated applying combined
  deposit interest rates calculated by banks
  treasury
• Initial outlay is build up by IT design and
  implementation costs. The costs represent the
  pessimistic IT estimate.
• Project costs consist of personal costs occurring
  in the financial years 0 and 1. The yearly cost
  of one full time equivalent (FTE) is CZK 1 250
  tsd.
• Interest rate margin used is 5. The margin
  includes standard risk costs.
• Average balance of consumer loan is CZK 150 000
  and average maturity is 4 years.
• Fee income consist of initial processing fee
  charged as 1 of balance contracted. Further
  account maintenance fee is considered. This fee
  is charged monthly in amount of CZK 50 per
  account held.
• Provision costs are based on KRM empirical
  estimates
• Personal costs are understood as opportunity
  costs, where 33 branch loan specialists, 5
  analysts, 2 KRM specialists, 2 Loan settlement
  employees and 1 methodologist are
• considered. All these are currently employees of
  the bank. The FTEs will be fully utilised for the
  financial years 1-4 each costing CZK 1 250 tsd.
  per year.
• 33 loan specialists will each generate 5 cases a
  week in the year 1 and 8 cases a week in the
  years 2-4
• Administrative costs are considered as one off
  costs in amount of CZK 1000 per case.

17
Project

• Project contains three main phases
• Phase 1 - Analysis and consolidation phase -
  Deadline 30.9.2003
• Phase 2 - Design phase - Deadline 31.12.2003
• Phase 3 - Implementation phase - Deadline
  16.4.2004