Pro Credit Group Socially responsible and sustainable lending
Pro. Credit Group Socially responsible and sustainable lending to small businesses January 2014
A strong banking group A global leader in banking with small businesses in emerging markets with a strong mix of public and private owners, each committed to the group’s mission Socially responsible business model Solid risk profile Profitable growth committed to sustainability and combining responsible banking with a professional orientation a business model which enabled the group to withstand the recent crisis and remain profitable throughout constantly maintained its investment grade rating (BBB-) since its initial rating Well positioned for the current challenges in the banking industry combining emerging markets exposure with German regulation 2
The World of Pro. Credit (1) >2 m clients in 22 countries: - very small, small and medium companies Eastern Europe 72% of total assets - Private clients with low and medium income Latin America 24% of total assets Africa 4% of total assets 3
A group with a unique market position Microfinance institutions Target group orientation: Large, publicly listed banks Application of international standards: • Focusing on SMEs • Regulated by Ba. Fin • Long-term relationships with clients • Ma. Risk • Responsible banking • IFRS • Investment loans instead of consumer loans • Basel regulations • Highly effective credit technology • “Green finance” 4
Double Proportionality: an important convention in the German regulation 2. The frequency and the intensity of the bank need to be proportional to its size, examination of the ICAAP through the regulator risk structure and business volume. (SREP) needs to be proportional to its design. Internal Capital Adequacy Assessment Process (ICAAP) Processes designed to: - identify - assess - control and - report the risks of the institutes to the regulator. Driven by Regulator Driven by Bank/Institute 1. The internally designed processes (ICAAP) of 5
Minimum requirements for risk management (Ma. Risk) • Banks must implement an General Requirements Type of business Credit business appropriate and effective risk management within their risk- Trading business bearing capacity and in accordance with their strategy Market price risks Liquidity risks Operational risks Internal Audit Risk Concentration Material risks Counterparty risks Therefore, banks are expected to: • Identify • Assess • Treat • Monitor and • Communicate material risks • Principle of risk-relevance • Principle of segregation of duties 6
Pro. Credit approach to staff development The Pro. Credit Regional Academy in Colombia All potential new recruits participate in a six month Young Bankers Programme before being hired Bank training centres: Systematic, intensive on-the-job training: mathematics, accounting, specialist topics Regional Academies (Macedonia & Colombia): • Training of middle management (1 year) • Short-term trainings on specific topics Pro. Credit Academy (Fürth, Odenwald): Company-wide salary structure which links professional development and salary levels to performance and training level • Training of future senior management (3 years) • English training The Pro. Credit International Academy in Germany 7
Pro. Credit Group – Loan portfolio development 8
Loan portfolio development by currency 9
Business loan portfolio development by size (exposure) 10
Steady development of diversified loan portfolio 11
Financing medium and long-term growth: Business loans by maturity (volume) 12
Customer credit risk 13
PAR 30 and PAR 90 Coverage ratio 14
Key elements of lending to business clients 15
Our business clients • From family-owned and – run small scale • • Very small business clients • Typically relatively informal family businesses • Limited financial literacy – clients typically assess success cash-based business activity, agricultural activities to medium-sized businesses Virtually no audited financial statements, tax declarations often with only modest value for assessment of financial performance of the activity Relatively high degree of volatility frequent changes in the business model No start-ups, clients are experienced entrepreneurs Social and environmental exclusion list Small and medium business clients • Increasingly formalized businesses, stronger corporate governance structures and risk management capabilities 16
Our approach to lending Value-driven strategy • Transparency • Open communication • Social responsibility and tollerance • Service orientation • High professional standards • High degree of personal integrity and committment This translates into… • Focus on core business • High degree of diversification, transparency and simplicity • Carefull staff selection and intensive training …and lending operations that base on • Group standards with local adjustments • Know your client, building a long-term relationship with our clients • Individual approach, thorough assessment • Decentralized decision-making • Avoidance of over-indebtedness of the client • Rigorous arrears management 17
Segregation of duties in lending processes Very Small credit exposures Head office level Small/Medium credit exposures Member of Management Board (Business) Business Department Member of Management Board (Risk) Credit Risk Department Branch level FRONT OFFICE BACK OFFICE 18
We focus on basic elements of credit risk assessment Qualitative aspects Assessment of the client’s character, willingness to enter into a long-term relationship, ownership/management, market position, credit history Quantitative aspects Solid financial assessment (liquidity & net working capital, cash conversion cycle & financing of current assets, equity, profitability, determination of payment capacity) Investment Rationale for the investment plan, expected effect on the business Legal aspects Collateral Legal set-up of the business, signature rights, status of collateral, anti-money laundering check Solid collateral, appropriate coverage of the exposure 19
Main buffers incorporated in credit risk assessment Payment capacity Equity • Conservative determination • • Addresses assessment risk due to informality of clients We require typically an equity ratio of at least 30% • Structure of equity • Reduces impact of potential future volatility of business activity and/or markets Avoids overindebtedness Collateral • Conservative determination of fair market value and collateral value • Coverage ratios depending on maturity and risk profile of the client Investment • Conservative assessment of positive impact of the investment on the activity • Full costs are taken into consideration 20
PCB Georgia – examples of key ratios Debt ratio: The weighted average figure of the medium portfolio’s debt ratio equals 0. 47, indicating a rather low level of leverage. Medium Business Clients - Loan Portfolio’s Weighted Average Debt Ratio 0. 47 Interest coverage ratio (EBIT/Interest): There are only 4 medium clients (4% of the medium portfolio), whose EBIT does not cover the interest expenses incurred, these are the loans with already identified business problems, two of them are restructured. All of them are well collateralized. Medium Business Clients - Interest coverage ratio 7. 04 21
Principles for decision-making All decisions are taken by a credit committee The possibility for a credit limit is assessed for every client The adequate structure for the case – product, maturity, collateral Review of exposure to foreign exchange rate risks Adequate pricing of the exposure, fixed vs. floating rates Adjusting payment plan to the seasonality of the activity The business committee builds the basis for a long-term relationship with the client 22
Risk Classification System 23
Risk classification system • Ma. Risk require that meaningful risk classification systems are to be set-up, at least for risk • • • relevant credit exposures It should include not only quantitative but also, if possible, qualitative criteria In the Pro. Credit group, an expert risk classification system is applied for medium-sized business clients Due to the lending strategy, the group‘s loan portfolio contains only a relatively limited number of such clients Structure of risk classification system • The risk classification system is a supporting tool for the decision-making in medium lending. • Thew criteria have been selected based on the experience of a group of experts from different Pro. Credit banks • Initial back-testing suggests that the system is relevant • Further conclusions are difficult as the number of observations is too low. 24
Risk classifications – building for the future • Preliminary results from the medium loan portfolio indicate that the overall system is appropriate and effective • A broadening of the system to small business clients is under development • Nevertheless, risk classification systems will only be a supporting element in our credit risk assessment Ø Limited number of observations Ø Standardized qualitative assessment for the group under development Ø The basis for assessing quantitative indicators will remain weak § High degree of informality of clients § Volatility of client‘s activities § Limited availability of external/long-term data § Limited default history in our banks 25
Example of risk classification – PCB Georgia Risk class 1 2 3 4 5 6 7 8 Total No. of medium-sized credit exposures 11 122 24 22 20 4 - 2 205 • Only a minor share of lending clients are assessed through the risk classification system • Roughly 60% of medium business clients are categorized in the two best risk categories • Less than 1% of the clients is in the default category The back-testing shows (on very few observations) an appropriate distribution of the probability of default for the bank 26
Collateralization of the loan portfolio 27
Collateral valuation • Group policies provide a framework for assessing the fair market value and collateral value of collateral items • Significant immovable items must be appraised by professional appraisers • The professional appraiser must apply at least two valuation methods to determine the final fair market value Valuation methods for immovable collateral items: • The income approach to valuation – assessment on the basis of the rental income of the collateral; • The cost approach to valuation – based on the principle of substitution which asserts that no prudent buyer will pay more for a property than the amount for which the collateral item could be newly constructed; • The sales comparison approach to valuation – derives value by comparing the subject being appraised to similar properties that have sold recently through arm’s length transactions. For movable collateral items, basic assessment methods are provided as well. 28
PCB Georgia - Medium Loans’ Loan to Value Ratio The bank’s loan portfolio to medium business clients (USD 81 million) is secured by collateral with a fair market value of USD 133 million ( of which 93% immovable collateral) Collateral value/Loan portfolio Uncollateralized loan portfolio 129 % USD 9. 7 million Real estate Cars/Trucks Equipment Inventory Company shares Cash collateral Collateral coverage ratio indicates, that the given portfolio is secured by collateral by more than 100%. Fair market value/ Loan portfolio 164% 29
Michael Kowalski Head of Group Credit Risk Pro. Credit Holding Frankfurt, Germany kowalski@procredit-holding. com +49 -69 -951437 -195 www. procredit-holding. com 30
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