Good case practices in lending and loan portfolio management

Milan Dobeš

Conference on Lending StandardsJanuary 31st, 2014

04/21/23

Main observations on Georgian market

Deposit market:

Relatively low saving tendencies of the population

High dollarization of the savings – some 40% of deposits in the domestic currency and only ¼ of that amount in form of time deposits – mostly up to 1 year

Rather limited alternative savings options in financial instruments – which apart from negative effects, has also some positive ones for the Georgian economy

04/21/23

Main observations on Georgian market

Loans:

Last available data indicate ca 37% of loans being granted in GEL, approximately 1/3 of that amount with maturity under 1Y. Share of GEL denominated loans is up by 6 points during last 2 years

On the other side, only ca 1/6 of foreign currency denominated loans is granted for short term, proportion having slight downward trend

04/21/23

Retail portfolio

04/21/23

Major trends

Moderate increase of payment to income (PTI) ratio on the new production in 2013

Change of the product mix on the market in favor of secured and (mainly) unsecured consumer lending

Recent major wave of refinancing of mortgage loans from USD denomination into GEL

So far good performance of the BR retail portfolio across the board, nonetheless due to changes in the product mix the average 12 month default rate on BR portfolio increased by 20 bp y/y in 2013

04/21/23

Recent steps taken by Bank Republic

Elimination of highest income bracket from set of granting rules, thereby effectively decreasing PTI ceiling for this category of customers by 5 points

Introduction of the minimum income level for the customers from lowest income brackets based on number of dependent family members

Increase of minimum limit for loans for segment of very small businesses and professionals – this measure was mainly targeted on internal efficiency rather than cost of risk reduction on the segment being exited

The net effect of the steps above is however overlapping with effect of the economic slowdown and deflation threat on the market, therefore the analysis of the effects of the specific factors is not giving conclusive results

04/21/23

Examples of other measures being applied

Progressive PTI limits from 25%/35% for lowest income category to 50%/60% to the highest income bracket

10% reduction of PTI limit for loans where client undertakes FX or IR risk

Increased LTV requirement for the high volume mortgage loans

Limitation of overall volume on specific types of unsecured products

04/21/23

Early warning indicators

Early warning indicators application on retail portfolio, giving good view on performance of new production and possibility to predict future default rates

Total Retail Portfolio

IP3 IP6 HR6 HR12 HR18 HR4

04/21/23

Vintage analysis and default rate prediction

Vintage analysis of BR retail portfolio and respective product and product groups helped us to better manage and forecast default rate and by extension also Net Cost of Risk of the portfolio and better measure impact of specific actions or changes in strategy on the production and NCR levels

BR is still in phase of building sufficient database of statistical data in order to build a robust enough model, however the available data are already quite beneficial in areas of portfolio performance forecasting and risk based pricing

04/21/23

Vintage analysis and default rate prediction

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

IP3 HR6 HR12 HR18 HR24 HR36

Year 2010

Q1

Q2

Q3

Q4

0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%2.00%

IP3 HR6 HR12 HR18 HR24

Year 2011

Q1

Q2

Q3

Q4

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

IP3 HR6 HR12 HR18

Year 2012

Q1

Q2

Q3

Q4

Source: BR portfolio analysis

04/21/23

Non-retail portfolio

04/21/23

Major trends

Non-retail lending is still rather inclined towards collateral based lending strategies, which has some positive effects in terms of reduction of LGD and limiting growth of the Debt/EBITDA levels in the non-retail segment

Working capital needs are often financed by amortized MT loans instead of ST revolving lines following the actual working capital need of the company

Overall quality of financial accounting and reporting standards on the market still needs improvement

Despite improved client screening, default rate on BR non-retail portfolio increased by 63 bp y/y in 2013. Increase of PD is so far being compensated by reduction of LGD.

04/21/23

Steps taken by Bank Republic

In view of performance of portfolio of BR, but also other comparable SG subsidiaries, following criteria (among other) are being applied:

Debt/EBITDA is to be maintained under 3.0

Gearing on non-trading activities is to be below 100%

Limiting working capital financing to equivalent of 3 months of sales

In the current environment of rapidly changing interest rates, the ICR data and covenants has proven to be of limited utility so far in the effort to reduce the default rate on the new production

04/21/23

Lessons learned from other markets

Need of strict control of Debt/EBITDA levels, especially on new investment projects with unproven CF generating capability

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7,000.000

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2x to

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3x to

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4x to

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5x to

6xE

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6x to

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7x to

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GROSS FINANCIAL DEBT/EBITDA OF SLOVENIAN COMPANIES

BREAKDOWN OF ON-BS OF SLOVENIAN BANKS BY EBITDA LEVERAGE OF THEIR CLIENTS

(DEBT/EBITDA as of 2010, companies with turnover >2 M EUR)

04/21/23

Conclusion

While the lending standards on the market are still rather relaxed, the trend is visibly positive in this regard

The significant issue which remain to be solved is not the definition of the standards, but willingness and ability of the banking sector to enforce those rules

Especially the ability to enforce the lending conditions and especially financial covenants is still impaired by the quality of financial accounting and reporting on the side of the corporate clients

Thank You Thank You BR/Risk31.1.2014