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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)

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.

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.

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ABN AMRO today...

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.

Well- Positioned Bank **

RankingTotal assets- Worldwide 18- European 11

Solid Credit Rating

Long-TermMoody’s Aa3Standard & Poor AA-Fitch IBCA AA-

Global Resources *

Employees worldwide 97,000Branches and offices 3,000+

Countries/territories 60+

Strong Balance Sheet *

EUR (bln)Total assets 742.9Group capital 35.6Risk weighted assets 245.6

* 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 Owner’s 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

Note: n = 32 banks

Main SB segment definitionby geography

Cut-off turnover (MM)

North America

(10 banks)

Benelux(3 banks)

UK(4 banks)

Europe(12 banks)

Other(3 banks)

0 2 4 6 8

1.2 2.8 4.3

1.0 2.9 7.5

0.7 1.6 2.9

2.3 5.3 7.9

2.5 4.2 6.0

Average

70%

57%

41%

32%

0% 20% 40% 60% 80% 100%

Specialist segmentations observedSpecific segments served according to web-site (e.g. 70% of the 23 banks had a defined

‘Agriculture’ offer)

Non-profit

Minorities

Franchises

Agriculture

Mercer Oliver Wyman

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Players have positioned themselves as having a few

products in each family – ‘simple and standard’Simplicity of external offering

(Products per family – according to web-site)

0

2

4

6

8

10

12

14

Acc

ount

s

Sav

ings

Loan

s

Line

of

cred

it

Cre

dit

card

s

Leas

ing

Fac

torin

g

Families

# prods

n = 18 banks

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

Observations

Max

Avg

Min

Key:

Mercer Oliver Wyman

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Overview

Home Market BU’s (NL, US and Brazil) adopted Product Programmes for SME’s

Identify potential for further migration (NL & Brazil)

Products across markets are similar and ‘traditional’

Emerging markets: cautious start by other BU’s (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 >EUR 2,2 Billion

Cautious start in India & Indonesia

Development of plans for VGPB Business Owners in NGM Asia

SME Programme Lending Portfolio (December 2004)

NL

25%

US

36%

Brazil

37%

Indonesia

1%

India

1%NL

US

Brazil

India

Indonesia

SME Programme Lending Portfolio (Dec 01 - Dec 04)

0

500

1000

1500

2000

2500

3000

3500

Dec 2001 Dec 2002 Dec 2003 Dec 2004

NL

US

Brazil

India

Indonesia

Total

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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

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

Information-based StrategyReturn to Local Intimacy

HBOS’s 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

Multiple Business Model FocusExploit Retail Branch Coverage

Mercer Oliver Wyman

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Credit Process: Commercial versus Consumer/SME

Commercial Loans

Low volumeLarge heterogeneous

Deal-based

Audited financial statements

Account managementReview loan-by-loan

Senior managers approve large/complex loans

Consumer & SME Loans

High volumeSmall 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 don’t work in high volume lending

Planning Underwriting Operations Collections

The Boss

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Portfolio Management is in the core of Risk Management function

Credit CycleProduct Planning

Management Information Systems

Credit Acquisition

Account Maintenance

Collections

Write-Off

Risk Management

Interactive

Dynamic

Portfolio Management

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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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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

What is a Product Programme?

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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

Products ENR ( M) Infection NCL/ANR Rev/ANRBrazil - Total 754.322 5,60% 3,78% 22,49%Brazil - Overdrafts 74.593 9,10% 9,33% 81,52%Brazil - Loans 591.027 2,90% 2,07% 16,72%Brazil - Leasing 45.751 0,80% 0,28% 5,08%Brazil - Mortgages 8.707 12,40% 1,38% 7,81%Brazil - Rewrites 33.975 49,90% 23,38% 13,91%

e

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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?

Super Bad

Scorecard Maximum BenefitSuper Good

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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

111

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How It Works – Policy

30%

15%

8%6% 5% 4%

3%1% 0,5% 0,2%

0%

5%

10%

15%

20%

25%

30%

35%

40%Default Rate

Def

ault

Rat

eD

efau

lt R

ate

Low ScoreLow Score High ScoreHigh Score

Simplified UnderwritingSimplified UnderwritingOn Low Risk ApplicationsOn Low Risk Applications

Reject High Risk Apps Reject High Risk Apps To Lower Bad DebtTo Lower Bad Debt

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

Manual Review Manual Review Marginal CasesMarginal Cases

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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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david.yong@nl.abnamro.com

Thank you