Retail Banking in CEE - The Benefit of the Crisis_ Gaining Efficiency

THE

BENE

FIT

OF T

HE

CRIS

IS: G

AINI

NG E

FFIC

IENC

Y

RETAIL BANKING IN CEE

The benefit of the crisis: Gaining efficiency

1CONTENTPREFACE

FOREWORD

EXECUTIVE SUMMARY

PART I CEE RETAIL BANKING MARKET EVOLUTION 2008-2014

HARSHENING MARKET CONDITIONS TRIGGER EFFICIENCY IMPROVEMENT MEASURES

PART II THRIVING TOWARDS OPERATIONAL EXCELLENCE

HOLISTIC OVERVIEW OF APPLIED EFFICIENCY IMPROVEMENT MEASURES ACROSS CEE

RETAIL BANKS

PART III SUMMARY AND OUTLOOK

SEVEN KEY AREAS TO FURTHER IMPROVE EFFICIENCY

APPENDIX

METHODOLOGY AND SCOPE OF THE STUDY

ABOUT US

3

5

6

11

15

33

37

40

42

CONTENT

3PREFACE

PREFACE

Frigyes SchannenManaging DirectorRoland Berger Strategy Consultants

Patrick DesmarsSecretary GeneralEfma

In the last five years, the majority of the CEE banks executed significant optimization programs in order to adjust resources and adopt the operation to the turbulent market environment. The banks in the region significantly increased the level of cost consciousness and adjusted their operating/business model to a new level, where the cost focused approach gained significant role. Overall, in the whole region the structural changes transformed the CEE banking sectors landscape into the next level of banking.

There have been several individual and important studies already focusing on selected impacts of the crisis on its own, e.g. assessing the challenges and impacts of the crisis on risk management and in collection. Well, in reality, the impacts are never separated and always interlinked, so our aim with this report to better understand the overall picture. Therefore, Roland Berger Strategy Consultants and Efma, kindly endorsed by Sberbank Europe, conducted a holistic review on gaining efficiency and governance model optimization efforts in the CEE banking region. In the study, we do not just review the events of the past, but also present the identified key success factors and outline further improvement potentials.

This report in your hand contains the summary of results and provides an insight into how retail banks in the region handled the crisis covering the following main questions:

> How did banks change their governance/organizational setups? > How were client segment/target group focuses redesigned? > How did the channel priorities change (e.g. role of branch network)? > How to focus on personnel and material costs optimizations? > How did banks increase transparency?

During the last months, we have also personally interviewed board members of sixty large retail banks all across CEE. These findings were combined with the market and methodology knowledge of Roland Berger and the insights obtained during numerous projects in the region.

We still see that in the coming years cost efficiency improvement will remain a key strategic element. Even though the crisis is becoming pale as majority of the CEE financial markets now display cautious growth trends, the profitability of the sector is still below the historical benchmarks. The players are facing new challenges in gaining back the trust of customers and keeping the pace of the digital solutions across all retail markets.

It is our clear aim that this report can support you and your organization in assessing your governance model and strategy with identifying further improvement potentials to consequently better cope with the changing market environment in CEE.

5FOREWORD

FOREWORD

Andrs HmoriMember of the Board Sberbank Europe AG

Looking back six years ago, its important to remember that 2008 began the mostchallenging time for the banking sector in Central and Eastern Europe for 20 years. The CEE region was hit doubly hard as downturns in local economies coincided with outflows of funding to Western European banks.

But with many countries beginning to recover, its now less a crisis, more the status of todays reality. We have to live with it, draw the conclusions and lessons learned and find the opportunity for gaining efficiency in these circumstances.

In Sberbank Europe, we realized the demand for the mindset change as ourcompetitors. We had to develop new strategies for CEE countries, set new rules of the game, define new steering and governance models and new value propositionsand focus areas.

We were forced by the new setup to take the next step and begin focusing on actual growth opportunities. Doing this exercise meant taking into consideration all the available know-how, good and bad practices. Reshaping our cost efficiency and governance model is still a high priority for us along with clear definition of our target segment and channel priorities in each CEE country.

These challenges motivated us in Sberbank Europe to follow this study closely. We consider it a useful insight, a detailed status report as at 2014 on the previous six years and the current issues and capabilities of the CEE retail banking sector complemented with valuable recommendations for future development. It is clear to us that there is still scope to increase efficiency similarly to other banks hence this study will hopefully help us and other readers to identify how to redesign governance models and increase efficiency based on experience and insight.

6EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

The crisis affected all retail banks, but the impacts are different in each CEE sub-region

Strategic focus is needed Shift from product towards client centricity with transforming channel functions

100%

2008 2013

76%

MARKET ENVIRONMENT

The financial crisis has heavily hit the entire CEE banking market. While all surveyed banks were profitable in 2008, five years later every fourth bank realized losses. However, the impact of the crisis and recovery differs by subregion: Poland, Czech Republic and Slovakia (North Central Europe) managed to remain profitable in terms of ROE, whereas Hungary, Slovenia and Romania (Central Europe) had to cope with serious market downturns yet there are already signs of recovery. In South Eastern Europe profitability plummeted, but due to the significantly increased NPL ratios a recovery still seems to be a long process.

Figure 1. Challenging market developments [% of banks with positive PBT within the sample]

After years of uncontrolled growth, the crisis forced CEE banks to realize that without more emphasis on operational efficiency and costs, profitable operations cannot be achieved with the desired result anymore. Everywhere, efficiency improvement became a key concern. Moreover in todays volatile, uncertain, complex and ambiguous world, a strategy where all market segments are equally targeted, cannot be maintained and a clearly set focus area is required. The entire industry is undergoing an enormous transformation process utilizing some of the best practices from other industries as well.

On the stagnating markets nearly all banks launched a huge variety of efficiency improvement programs from governance model changes to large scale process optimizations. In many cases, it was only enough to balance the negative effects of the top-line: solely 46% of the banks could achieve a real efficiency improvement in terms of their cost-to-income ratio.

7EXECUTIVE SUMMARY

Holistic approach is required for definition of strategic focus

Revenue focus

Cost efficiency focus

MATURE

TRANSITION

EMERGING

2020

2014

2005

2008

2000

Bubble size represents the total assets on the market

Figure 2. Development and outlook on of the CEE banking market 2000-2020 Overview of key phases

1. STRATEGIC FOCUS

In order to achieve sustainable, efficient and effective operations a holistic approach is required: optimizing not only the resources, processes, organization and improving the transparency, but also changing the general mindset of the bank. Following rather improvised, ad hoc counter measures to overcome the most difficult times of the crisis, it is now time to define strategic focal points for the future.

Banks are clearly moving from product centric operations towards client centricity providing differentiated treatment for predefined client subsegments. Along this road, affluent and micro clients are becoming the important growth targets nearly at all banks. In order to excel in client relations, banks should learn how to be proactive in all possible client interactions from target segment definition to their value proposition. Channel efficiency and client needs should be optimized together and should reach an improved next level of service.

In order to better serve the clients, banks are applying a more balanced channel approach with changing roles. The branches are undergoing a transformation to become more advisory focused than before, while local administrative tasks are declining. This is a clear consequence of centralization and cost optimization measures based on the digital solutions.

In order to have an optimal product portfolio, banks need to master the delicate art of finding the right balance between a tailored value proposition and the standardization of product offerings. This is not equal to a forced shrinking of the product portfolio, but a rather intelligent review and adjustment of products.

82. GOVERNANCE MODEL

There were no tremendous governance model shifts in the past six years The largest transformations were triggered by acquisitions/re-nationalizations. However, major banking groups present in the region adjusted their operations to enable stricter monitoring and control on their local subsidiaries. Clear indicators of these actions are the increasing presence of independent control functions (CFO, CRO) in Management Boards (+15%) with a considerable expatriate share (35%).

In the local organization setup we are again in the era of centralization on all levels: back-office functions and managerial roles are being centralized. With these measures the level of transparency and control has increased significantly.

The largest wave of outsourcing came to an end even before the crisis, when the increased capacity/quality need in some areas (IT, legal, CC) triggered further utilization of external capacities. However, many banks are now considering to (re)insource at least partially these same functions.

3. TRANSPARENCY

KPI systems have become more detailed and the frequency of reporting has significantly increased. The demand for more numbers originated from three sources: regulators, headquarters and local management. The underlying issue of KPIs, which created a lot of frustration in the banks, that these requestors were not aligned and a lot of reporting was generated simultaneously, doubling/tripling the data and capacities. With time, a lot of efforts were invested to streamline the huge information flow into a level which can be sustained.

Some of the KPIs had direct and real value impact. For example, they provided the basis for sales force efficiency projects launched across the whole region. Nevertheless, further automation, streamlining and integration of KPIs are some of the key challenges for the future.

4. RIGHTSIZING

CEE banks have made tremendous efforts to decrease their cost base to a lower level, and then again, through increased efforts to an even lower level. Actually, various cost reduction programs launched, year after year. The reason is partly a moving target: to reach a lower level due to market conditions. The other reason is the efficiency of the programs; only a part of the programs could really reach the target in reality. And only those were successful in the long run, which were able to combine a top-down (management commitment, clear target setting, responsibility, holistic thinking) with a bottom-up (structured analysis, long-term thinking, detailed-feasible adjustments) approach. IT and marketing (following serious cuts in past years) are the cost blocks that are expected to increase again in the future.

EXECUTIVE SUMMARY

Stable governance models

Increased level of transparency

Continuous rightsizing

95. PROCESS IMPROVEMENT

Standard process improvement methodologies (LEAN or Six Sigma) have been extremely popular: 53% of the banks applied them or something similar in the last years. Another 27% ran projects with their own or a group developed methodology. Opinions on the results have been mixed, since the majority of benefits are still to be realized in the future. Overall, these structured approaches are affecting the general mindset and the cost culture of the bank at the highest level. These impacts of course are rarely measurable, but we have seen structural changes due this impact and the real successful changes were rooted in this.

6. IT SYSTEMS

IT has transformed itself from a simple functional enabler to a real driver. All banks cutting IT expenditures (or postponing investments) are now regretting the missed opportunities to create a competitive advantage on the market.

Nevertheless, the structure of IT expenditures has changed. The forced prioritizations of projects enabled the organizations to achieve more focus on topics, which are really important. We can see a clear shift toward strategic business drive behind the major cost blocks and we tend to highlight that one of the greatest challenges for the future is still how to facilitate business decisions on IT investments.

7. CORPORATE CULTURE

Finally, we are all aware that sustainable operational excellence can only be realized with skilled employees who are actually involved day by day. This is a mindset change or a cultural shift including cost consciousness and need for continuous improvement, which is inevitable in order to reach the next level of banking. One might forget, this is not a single project to achieve, but a long lasting, meticulois step by step approach. Our review of the sector showed that lot of banks stand only at the beginning of this path.

EXECUTIVE SUMMARY

Popular process improvement methodology

IT became a real driver

True mindset change required

11

PART I

11

CEE RETAIL BANKING MARKET EVOLUTION 2008-2014 Harshening market conditions trigger efficiency improvement measures

12

North Central Europe (NCE) absorbed the shock better than other subregions

CEE REATIL BANKING MARKET EVOLUTION 2008-2014

ROE [%] NPL [%]

10.2 6.9 5.3 4.4 3.7 3.8

14.6 6.6 0.1

-3.9 -7.4 -2.8

21.716.716.316.116.114.6

12.5 6.4 5.3 6.3 5.0 3.3

12.8 1.1 10.315.517.013.7

08 09 10 11 12 13

3.9 6.7 8.7 9.6 10.911.6

3.2 6.6 9.3 12.615.818.9

4.1 6.3 7.2 6.9 7.7 7.5

4.9 8.3 12.414.3 15.516.9

4.2 9.0 9.2 8.2 7.4 7.0

08 09 10 11 12 13

EE

SEE

CE

NCE

CENTRAL AND EASTERN EUROPE (CEE)

ECONOMIC DOWNTURN HIT THE REGIONAL PROFITABILITY

The financial crisis has heavily hit the entire CEE banking market. While all surveyed banks were profitable in 2008, five years later every fourth bank realized losses. The regional return on equity dropped by almost one third from 10% to 7% during this period, as can be seen in Figure 3.

Upon examining the subregions, this same pattern is visible although the magnitudes differ. North Central Europe (NCE) absorbed the shock better than other subregions, dropping approximately one fourth in return on equity in 2009. Early financial reforms greatly contributed to this strong performance, especially in Poland. Central Europe (CE) and South Eastern Europe (SEE) roughly lost half of their profitability in the same year, while due to the severe effects on Ukraine, Eastern Europe (EE) barely remained profitable.

Figure 3. CEE banking market return on equity and non-performing loans

After the initial blow, the profitability development of the subregions differed again greatly up until 2013. Quick recovery is observable in EE, which is purely driven by Russias performance. The return on equity stabilized in NCE following the initial shock and only dropped slightly in 2013, while still remaining healthy at nearly 15%. Importantly, both EE and NCE seem to have contained the share of non-performing loans and display a decrease in share in 2013.

Contrary to this, the share of non-performing loans shows a strongly increasing trend in CE and SEE, while profitability is still fragile in both subregions. CE seems to be slowly recovering from negative profitability, while SEE profitability has been decreasing for the past two years to just over 3% in 2013. Containing the share of non-performing loans without taking another hit to profitability will be a key challenge for both subregions in the short-term. Finding new growth opportunities and managing the non-performing portfolio must be combined effectively, requiring clear steering and transparency. Further sub-regional and country specifics can be examined in the Appendix.

13

Key concern: efficiency improvements

CEE REATIL BANKING MARKET EVOLUTION 2008-2014

SUSTAINABLE GROWTHORGANIC GROWTH

EFFICIENCY OPTIMIZATION

Totalassetchange'08-'13 [%]

Efficiency change1) '08-'13 [%]

200

160

120

80

40

0

-4080 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

CE NCE SEE EE Bubble size represents the total assets

1) Change in cost-to-income ratio

EMERGING EFFICIENCY LANDSCAPE

After years of uncontrolled growth the crisis forced CEE banks to realize, that without more emphasis on operational efficiency and costs, profitable operations cannot be achieved anymore Efficiency improvement became a key concern. In the stagnating markets the majority of banks launched a huge variety of efficiency improvement programs from governance model changes mainly driven by renationalization and mergers & acquisitions to large scale, group-wide process optimizations. In many cases it was only enough to balance the negative effects on the top-line solely 46% of the banks could achieve real efficiency improvements in terms of their cost-to-income ratio.

As can be seen in Figure 4, especially the large players in NCE managed to display asset growth and efficiency improvement, creating the basis for a sustainable future growth outlook. On the other hand, large players in CE have grown at the cost of their efficiency ratio, indicating a less controlled organic growth within their markets. Mid-sized players in CE have shown a decrease in total assets over the same five year period, while efforts to increase operational efficiency yielded observable results. Additionally, small players showing significant asset growth over the past five years are predominantly subsidiaries of relatively large banking groups capturing market share aggressively.

Figure 4. Total asset and efficiency development of selected banks in CEE

Moreover, in todays volatile, uncertain, complex and ambiguous world, a strategy where all market segments are equally targeted, cannot be maintained and a clear set of focus areas is required in order to succeed. By now, efficiency improvement has become an important topic, which erected from the period mainly focused on cost-cutting. The entire industry is undergoing a huge transformation process utilizing some of the best practices from other industries like automotive, retail and communications as well. At some players, the indirect cost optimization levers moved into the focus. For example, during a strategy update for a specific segment, the service level enhancement program has a beneficial impact on costs.

15

PART II

STRIVING TOWARDS OPERATIONAL EXCELLENCE Holistic overview of applied efficiency improvement measures across CEE retail banks

15

16

Efficiency means:Clear strategic focus, more centralized governance model, transparent operations, leaner cost structure and processes. This all supported by IT solutions and the right mindset of employees

STRIVING TOWARDS OPERATIONAL EXCELLENCE

Cultural change7

IT system6

Process improvement5

Rightsizing4

Governance model2Transparency3

Strategic focus1

> The IT systems are not anymore just enablers but truly driving the business

IT systems6

> Continuous adjustment of capacities and costs required to enable cost efficient operations

Rightsizing4

> Processes are the key drivers of efficiency, their continuous improvement is inevitable

Process improvement5

> A strive for continuous improvement and increased flexibility have become prerequisites

Cultural change7

> As a fundament, transparency in terms of costs and profitability needs to be created

Transparency3

> The governance model has to create the right framework for efficient and effective operations

Governance model2

> If a clear strategic focus is set, operations can be adjusted accordingly

Strategic focus1

STRATEGIC FOCUSShift towards client centricity with transformed role of channels

1

Product

Channel

Client

> Enhancing different organizational treatment of retail subsegments like affluent/premium clients or micros (micro companies and sole entrepreneurs recent trend to consider them among retail clients)

> Gaining more distinction between traditional channels (most importantly branches) and e-channels (internet banking, mobile banking)

> Emphasizing internal focus on specific product categories most commonly loans, saving products, current accounts, POS, credit cards, etc.

3

2

1

FIVE AREAS AND TWO ENABLERS TOWARDS OPERATIONAL EXCELLENCE

The banks have launched a large variety of efficiency improvement programs over the years. There are five key areas: redefining strategic focus, adjusting governance model, improving transparency, decreasing overall cost levels and redesigning processes (see Figure 5). Furthermore, two enablers proved to be of key importance: changing the mindset within the organization (culture) and IT developments including the repor-ting/monitoring systems. And now, process improvement and strategic redefinition are in the spotlight. We do believe however, all should be considered holistically.

Figure 5. Holistic approach to improve efficiency

In the following pages we will guide you through all factors one-by-one in order to define the framework, key lessons learned and recommendations for the future.

Figure 6. Three basic logical elements of business model definition

17

Shifting focus towards clients and channels

Focus on affluent clients


FIND THE RIGHT FOCUS: THE CLIENT

Prior to 2008, the mass private individual (PI) market was considered as the key segment for growth; focus was mostly on loan products, especially mortgages. In a positive market environment with opportunities to constantly increase product sales, a decentralized, product centric thinking was the dominant and suitable approach. However, this also led to the sub-optimal, simultaneous, isolated treatment of clients by different organizational units and also by relationship managers, which implicated a low level of standardization and transparency as well.

As the effects of the crisis hit the banks, many of them first reacted with rather unfocused improvisation. A clear shift from product orientation could be observed. During the crisis, banks started to gear their organizational focus more towards clients and channels (see Figure 7). 84% of banks in the study primarily stated to have product focused operations in 2008, whereas only 14% in 2014! With the deteriorating loan portfolios individual client relations have become more important at the same time digital channels reached maturity to become more independent.

Figure 7. Evolution of banks organizational focus [% of importance]

202020142008 FUTURE TRENDSRECENT CHANGES

Client Client Client

Product drive Balanced view Client centricity

ChannelChannelChannelProduct Product Product

4% 14% 14% 14%

16%

49%

14%24%

31%

84%

4%

4%2%

2% 2% 2%

4%

6%

10%2%

This shift in the organizational focus is expected to continue and become prevailing by 2020. Top managers envision to conduct predominantly client and channel centric operations in the future. Attention to the channels will rise moderately, primarily driven by internet and mobile banking, while in terms of products, the trend will go towards standardization and simplification of the product offering.

MICROS AND AFFLUENTS: THE NEW TARGET SEGMENTS

Due to the increased non-performing loan ratio and decreased profitability of the mass segment, banks clearly turned towards the currently more profitable micro and affluent PI clients, which are expected to be the main growth drivers in the coming years as well. Their advantage is on one hand that they offer relatively high profits and that they dont require large investments due to the rise of the segment. The KSFs are attributable to tailor-made service levels and product offering.

18 STRIVING TOWARDS OPERATIONAL EXCELLENCE

Figure 8. Client focus based on growth potential1)

Banks did not only pay more attention to the new target segments but also realized that the pre-crisis approach of targeting all segments did not work any longer. Therefore, banks started to move away from a no clear focus in retail towards a differentiated strategy. This can be traced by the introduction of new segmentation models specializing on client sub-categories like SMEs. The trend is expected to continue in the next years, resulting in the mass market gradually losing importance compared to 2008 and even today (see Figure 8). The mass PI segment remains only important for large banks with above average quality client portfolios, but none of the challengers are planning to focus on this segment in the coming years.

Figure 9. Relative segment focus based on growth potential

2020

2014

2008

No potential

Mass micro

1) Average of respondent top managers 2) Larger micro clients/small companies

Large potential

Premium micro2) Mass PI Affluent PI Private banking

ACT PROACTIVELY: CAPTURE THE NEW TARGET SEGMENTS IN TIME

The shifting attention to the new target segments is the key driver behind the change in the organizational focus, as can be observed in Figure 9. In order to serve the new target segments, banks have already changed the way they manage the segments, refreshed the targeted product offering and improved their respective KPIs. Key element of the next steps is the enhancement of the customer experience, which is expected to reduce the churn rate and improve revenues generated by existing clients.

Micro

DifferentiationAffluent PIMass PI

202020142008 FUTURE TRENDSRECENT CHANGES

Micro

No clear focusAffluent PIMass PI

Micro

SpecializationAffluent PIMass PI

Banks started to move away from a no clear focus in retail towards a differentiated strategy

Improving segmentation to allow differentiated approaches for sub-segments with increasing importance

19STRIVING TOWARDS OPERATIONAL EXCELLENCE

Figure 10. Approach for the new target segments1)

RECENT CHANGES

1) Based on verbatim analysis of the responses

FUTURE PLANS

KEY SUCCESS FACTORS

> Dedicated segment management units have been set up in HOs

> Understanding clients (KYC) - Improved CRM capabilities - Sophisticated segmentation

models> Refreshing product offering - Tailor made offerings & innovation - Standardization & simplification on segment level> Improving KPI system - Service quality measurement - Sales force effectiveness - Profitability on branch and client/segment level

> Focus on more detailed segment based offering (e.g. pricing, products) advanced profitability and life-cycle models

> Shift from acquisition to exploitation: increasing loyalty and churn prevention mainly by improved client experience (minor changes with large impact)

> Further client centricity can be achieved by channel integration and improvement of CRM capabilities

> Banks need to be more PROACTIVE in multiple areas:

- Having a clear vision with tangible targets to reach - Addressing the right clients with tailored messages, channels and products - Changing the mindset from servicing towards advisory orientation - Invest into technology proactively> Proactivity can only be

achieved by better understanding of the customers and the changing market environment

THE NEW EDGE: CHANGE THE VALUE PROPOSITION AND OPERATING MODEL

In an effort to further penetrate the micro and affluent segments, banks have put higher emphasis on tailoring the product offering and marketing/communication, whereas differentiated pricing is less dominant (see Figure 11).

On the operational side, banks had to react to the changing service level needs of the target segments. In order to achieve this, they supported their efforts by developing dedicated organizational units and dedicating additional workforce to the micro and affluent segments.

Figure 11. Differentiated treatment of target segments [% of banks applying]

VALUE PROPOSITION OPERATING MODEL

Product offering> Default package offers, value proposition

Products are becoming more standardized

Pricing> Few banks provide preferential pricing for

target segments Risk/loyalty based offers

Subsegment management in HO> Dedicated subsegment management units

have been set up as a new trend

Servicing model> Main differentiators are dedicated

relationship managers and sometimes even call center staff

Marketing/communication> ATL campaigns, but mainly BTL

communications and special events adjusted to client segments (30% have dedicated website)

Differentiated scoring model> Adjusted scoring model is not common

practice, however plans for introduction

56%56%

23%

51%

67%

67%

Increasing needs for differentiated treatment per segment


KEEP IT SIMPLE AND SMART: DEVELOP NEW PRODUCT PORTFOLIOS

During the differentiation of the value proposition, banking leaders identified 3 key requirements for a successful product portfolio: it has to be accessible, attractive and cost efficient (see Figure 12).

In a world where clients are required to make choices without a clear and transparent overview of the offering, a default package offer resolves this initial obstacle and makes the product accessible. To exploit the potential of existing and to capture new clients, banks tended to develop standardized default packages differentiated for each segment. To account for the slight difference in client requirements within a segment, banks have typically developed add-ons or have used pricing differentiation.

In order to make the default packages and add-ons attractive, banks undertook a more thorough segmentation approach than before to identify the value drivers for homogeneous groups of clients. This more granular approach led for instance to the separation of micros and its identification as a lucrative target segment.

Figure 12. Top three requirements for a successful product portfolio

Adequate simplicity Segment based tailoring Standardized core products

"ACCESSIBILITY" "ATTRACTIVENESS" "COST EFFICIENCY"

Furthermore, the structure of default packages and add-ons had a positive impact on cost efficiency. Higher levels of automation and more efficient decision lines reduced the cost to serve. Banks are increasingly considering the standardization and streamlining of their core products in product development, in order to reduce the complexity of sales, service and operations. To differentiate the value proposition, add-ons can serve the segments needs regarding specifications without compromising the transparency of the product offering.

GO DIGITAL: CHANGE THE CHANNEL FOCUS

The digital less personal channels have gained and will continue to gain importance in the interactions with clients (see Figure 13). The primary driver is the increasing internet penetration which leads to increased internet banking and mobile banking usage, which are expected to grow the fastest of all channels. Top executives are divided on the question which of the two will be more important in the future.

Among the channels with personal contact, a more balanced approach is expected with a decreasing importance of branches and a positive trend for call centers and partnerships (e.g. bancassurance). Even though the utilization of the mobile sales force declined in the past years, recently there are plans for (re)launches especially for micros and cards.

Product portfolio: accessible, attractive and cost efficient

The fastest growing channels are internet and mobile banking


Figure 13. Evolution of channel focus [4 very important; 1 not important]

3.63.63.22.32.72.9 2.11.92.3 2.42.6

3.1

2.22.42.5 1.41.52.1 2.03.03.4

1.62.43.5

2.32.22.1

PERSONAL CONTACTBranches Call Center Mobile Sales Force Partneships

ATM Self service terminal Internet banking Mobile banking

Brokers, IFAs

IMPERSONAL CONTACT

EXTERNAL CHANNELS

> Branches will remain important, however with a modified role, rationalized format and number, and with a changed attitude from the staff

> The nr. independent CCs increased (servicing); now in many cases a move to enhanced sales capabilities and towards a fully fledged virtual branch have started

> Due to quality and cost issues many banks stopped this service; recently plans for (re)launch especially for micros and cards

> Bancassurance partners are becoming more important (pure margin product)

> Several good examples for retail cooperation (POS loans, loyalty programs)

> Even though profitability issues, all the banks consider it as a must to have; future investments into smart ATMs

> Neither the technology (expensive, limited functionality), nor the clients (need for personal touch) are reached the desired maturity Expected to change

> Internet banking is constantly gaining on importance; by 2020 it is expected to be the among the most important channels

> Even though mixed views on average banks expect that mobile banking will be even more important than internet banking or even branches

2008

20142020

> On some markets (e.g. Hungary; Czech Rep.; Slovakia; Ro- mania) brokers are unavoidable for certain products (especially mortgages, personal loan)

As already mentioned briefly, the key expected negative trend is the deterioration of branches significance. Most servicing functions will be partially replaced by either electronic solutions or the call center (e.g. customer inquiries). At the same time admin and risk functions are experiencing a wave of centralization. The function of a branch will thus shift primarily to sales (see Figure 14).

Figure 14. Relative capacity allocation of branch activities [average % of total branch FTE]

23%26% 25%

21%22% 11%

36%27% 50%

2%3% 1%

4%0% 4%

11%20% 9%

2%2%Risk

Admin/Archiving

Outbound

Inbound

Sales

Cashier activities

General servicing

Serv

icin

gSa

les

Calls

Back

off

ice

func

tions

1%

TRENDFUTURE TRENDS

RECENT CHANGES2008 2014 2020

Decreasing importance of branch network

22

GOVERNANCE MODELCentralization and stricter control on all levels

2


TIGHTER CONTROL: CHANGING STAKEHOLDER STRUCTURE

Since 2008, the predominant driver behind the change of governance systems was a shift in the stakeholder structure. This shift originated primarily from mergers & acquisitions while the (re)nationalization of certain banks brought new stakeholders in. States expanded their presence in the banking sector in the CEE, although the pace has been quite moderate with growth from 9.5% to 13.5% between 2008 and 2013 as can be observed in Figure 15.

Figure 15. Ownership structure and board size change at CEE retail banks

BANK OWNERSHIP STRUCTURE [%]

100%

15%

10%

5%

0%2008 2009 2010 2011 2012 2013 2014

4.95.2

4.8

3.3

2008

MANAGEMENT BOARD SIZE [#]

PRIVATE

STATE

Banks undergone M&A CEE average

+48%+8%

Driven by the new stakeholders but also by depressed profits, control was increased on the group as well as on subsidiaries. This was reflected by the size of management boards, which increased from 3.3 to 4.9 persons on average in banks which have undergone M&A in the past six years.

The increase of board size was an indication of the trend to include functions in the board, which required more scrutiny and tighter grip. This size increase was primarily driven by the inclusion of the Chief Financial Officer and the Chief Risk Officer in the board as can be seen in Figure 16.

Another recent trend is the strengthening of compliance in the departments directly reporting to the CEO, which was mainly forced by regional standards defined by the regional HQ. 79% of organizations have strongly enforced an international standard, an intended deviation of which requires group approval or can also be caused by local regulatory needs. 21% of companies on the other hand have only recommended standards, which are defined centrally and may be fitted to local requirements by local management.

The shift in stakeholder structure originated mainly from M&As

There has been a clear increase in the size of boards over the past years


Figure 16. Management Board compositions 2008-2014 [% of existing position at bank]

Increased control is also observed on an operational level. Governance models are now developed centrally and passed on to the subsidiaries in a bank group. On the other hand, subsidiaries tend to have a higher degree of flexibility to fine-tune the company standards. This phenomenon is primarily driven by local regulation and market circumstances which require flexibility. The one size fits all principle does not work and as a result, subsidiaries are allowed to adjust to local requirements.

INSOURCING: NEW TREND ON THE RISE

Tighter control does not only materialize on the board level. Insourcing has been put on the agenda of some banking leaders as well. Traditionally, security and cash collection services had been outsourced before 2008, but after the crisis hit, facility management and HR recruiting became the two most outsourced areas.

Nonetheless, nowadays the wave of outsourcing has flattened and insourcing has become more attractive. Higher control of quality and the internalizing of knowledge is highly appreciated during a time of high market uncertainties. The three key areas for insourcing are: IT, Call center and Collection as can be seen in Figure 17.

Figure 17. Outsourcing and insourcing trends [plans for the future %]

OPERATIONS

CEO100% 92%

CMO

11% 14%

Corporate

72% 71%Retail

65% 69%

COO

63% 75%

Other1)

26% 29%

CRO

70% 78%

TOTAL AVERAGE [Nr. of Board Members]

4.7 5.0

RISK/FINANCE/CONTROL2)BUSINESS

2008 20142008 2014

10% 23% 12% 14% 20%

39% 41% 28%

14% 31%

26%

21% 18% 21% 33%

CFO

63% 73%

24% 38%38%

> In some cases Corporate Head is responsible for Treasury

> The combination of Ret. and Corp. did not gain popularity

> COO position has become more common usually combined with CIO

> Other most common positions are HR, CIO, Treasury and Controlling

> The number of Board Members increased during the crisis, while expat share remained constant

> Increase is mainly due to new independent control positions (CFO, CRO)

> At one third of the cases the CEO is also responsible for one of the key functional areas no pattern can be seen: based on personal preference

> CRO position is more common, however the share of expats remained constant

> There are more CFOs with the largest share of expats

> Retail Heads usually cover the network and marketing as well

Share of expatriatesCMO: Chief Market Officer1) e.g. HR, Treasury, CIO, Controlling 2) Combined CFO-CRO position at 7% of the cases (counted to CRO)2008 2014

Share of existing position

OUTSOURCING INSOURCINGOutsource Insource

IT

Call Center

Collection

11%

9%

22%

Insourcing is gaining importance: especially IT, Call center and Collection

24

TRANSPARENCYIncreased granularity and frequency of reporting

3


FACT BASED DECISION MAKING AND CONTROL: THE NEW KPI SYSTEM

The prevalence of Big Data and fact-based decision making has urged banking leaders to enhance their KPI systems in order to ensure that the increased amount of available data is utilized to maximal extent.

Additionally, KPIs are needed for each level of steering in a bank with different format and content requirements. From branch employee to board member, each person requires specific data to base decisions on and in order to set realistic targets to reach.

Figure 18. Evolution of KPI systems20142008 RECENT CHANGES

IMPORTANCE OFEFFICIENCY KPIs1)CHANGES IN TOPIC

Standardized indicators INCREASING

UNCHANGED

DECREASING

76%

18%

6%

46%

43%

11%

Regular monitoring

More detailedKPIs

Risk adjustedKPIs

1) Example: cost to income ratio (CIR)

REPORTING FREQUENCY

> Over half of the respondents indicated an increase in the reporting frequency

> Majority of banks have expanded the number of KPI metrics since the start of the crisis

> Increased importance of risk-weighted KPIs due to regulatory requirements

> Strong efforts to streamline internal reporting and optimize the flow of information

To achieve the goal of utilizing all critical data and differentiating KPIs for each level of steering in a bank, the following trends as can be seen in Figure 18 emerged:

Internal reporting was streamlined. In most banks there is a mismatch in the reporting demand and what information reports provide. Secondly, some reports tend to overlap, causing unnecessary work. Lastly, overlapping reports typically rely on different sources and arrive to different values for the same KPIs. This undermines the credibility of reporting and shifts the discussions away from concrete fact-based decision making.

Frequency and granularity of reporting increased. To understand the root cause of trends, deep dive reports are required for KPIs that allow managers to draw the right conclusions from specific granular data. In more advanced reporting systems, managers have the ability to investigate the KPI of their interest by browsing a data cube instead of asking employees to produce ad hoc reports.

Moreover, new KPIs were integrated into the reports which reflect what currently is of key importance to monitor. Since the dynamic growth phase of banks was crippled by the crisis, efficiency and risk related KPIs gained importance. Over 75%

Enhancement of KPI systems to allow increased data granularity and frequency of reporting

25

RIGHTSIZINGBalanced top-down and bottom-up approach ensures sustainable efficiency

4


of the participating banking leaders stated that the importance of efficiency KPIs has increased in recent years.

KPI 2.0: THE KPI THAT MATTERS

Three factors shape the change in the importance of KPIs: regulatory requirements, group policy and local decision making. From these three, the group policy is the strongest component. Groups are primarily interested in cost related KPIs, especially operating and risk related costs. Revenue related KPIs gained much less importance, meaning most banks attempted to improve their bottom-line on the cost side since 2008.

ON DIET: COST CUTTING ACROSS THE BOARD

To counteract the negative profit impact of pressured revenues, banks turned to cost cutting measures of which the effects can be seen in Figure 19.

Figure 19. Change of operating costs by cost categories [% of total change]

-10.6% 4.4%Marketing (ATL, BTL)

IT 0.9% 5.0%

-4.4% -0.3%Facility management

Personnel costs -7.6% -0.3%

-8.1% -0.5%Travel, mail and CEP

-4.5% -0.6%General office services and supply

-2.6% 0.9%Professional services (consulting, audit, legal, )

> Cuts in personnel costs are indicated to be continued alongside growth

> Savings achieved in facility management due to branch network optimization

> New IT investments (especially for CRM application) is indicated to push IT costs up

> Paper mail reduction programs> Mobility is expected to increase again

> After years of spending reduction (especially ATL), marketing spending is set to grow

> Centralized procurement to drive down costs

> Process redesign and tendering> Less external consulting, development

of inhouse consulting services instead

1) Based on respondents aggregated average opinion

More than 1% decrease More than 1% increaseBetween -1% and 1%

2014 FUTURE TRENDS

RECENT CHANGES

2008 2020

On the material cost side, the easiest elements to cut up to 2014 were marketing and travel related costs. These measures could be implemented with a short lead time and almost immediate effect.

Regulatory requirements, group policy and local decision making have the largest influence on the utilized KPIs


The implementation of facility and personnel cost related measures typically takes longer, namely 6-12 months. The negotiation of lease contracts is usually the most important task. The difficulty is that banks grew rapidly prior to the crisis and entered 5-10 years lease contracts for their branches and headquarters at the high real estate market prices of the time. Re-negotiating the contracts or reducing the cost requires more manpower and knowledge, for which external real estate consultants were usually hired.

On the personnel cost side the sales network was scaled back by 5% on average. At the same time, other functions remained overall even or increased their headcount. Call centers increased due to higher NPL rates and the corresponding increase of outbound calls. Other significant increases were to be observed in retail risk, where the increased reporting demand as well as higher focus on risk required more workforce. The overall personnel cost reduction has been significant, reaching almost 8%.

Moving forward, it is expected that IT and marketing spending will pick up again, while banks will try to maintain the rest of the cost blocks at todays level. IT spending will be driven by new investments in CRM and risk related systems in line with the new target segments and higher risk consciousness. As for marketing, it is expected to rebound after the lower spending in the last years.

Overall, the trend shows that the significance of personnel costs diminishes, while IT will increase. Nonetheless, it is imperative for banks to scrutinize, understand and challenge their IT spending. Despite required investments, this is the only cost element which holds reduction potential.

Figure 20. Average share of cost blocks in the overall operating cost [%]

Travel, Mail and CEP

Marketing1)

General office service & supply

Professional services2)

Other3)

Facility management4)

IT

Personnel

1) ATL, BTL & PR 2) Consulting, audit, legal, etc. 3) Predominantly other administrative costs 4) Included real estate related costs

3%

6%

100%

3%

5%

9%

12%

13%

49%

100%

4%

8%

10%

13%

17%

44%

2%

2%

100%

4%

5%

8%

15%

15%

48%

2%

2%

100%

2008 2014p20122010

3%4%

5%

10%

14%

13%

49%

2%

Decreasing personnel costs, increasing IT costs


ROAD TO SUCCESS: COMMITMENT

Identifying cost cutting measures is a relatively straightforward task, implementation is the real challenge. There are a number of factors, which contribute to successful implementation: the most dominant is management commitment. Each level in the organization follows the example of the one above. Therefore, if the board is not 100% committed to the identified measures, they will not be carried out properly. There are always plenty of excuses and explanations why measures cannot be implemented. A good proportion of them stem from the desire of middle managers not to implement inconvenient cost cutting measures. Therefore, it is vital that the top management is committed to the goals it sets.

As can be seen in Figure 21, the key reason for failure is short-term thinking, which is closely linked to the KPIs. Cost cutting measures that fail typically do so, because the target was to have an impact in the actual year and not for the coming years.

Figure 21. Perceived success factors and failures [% of respondents]

LESSONS LEARNED

Banks need to be more critical when it comes to costs They always need to ask "why". There is always a potential for further improvements. Especially the assessment of IT investments is extremely difficult

Clear local management commitment is necessary in order to achieve targetsand to conduct cost conscience operations on a sustainable basis

10%

Transparency and responsibility for spending provide the prerequisite for sustainable cost efficiency

Ideally rightsizing efforts should be accompanied by process optimization programs and vice versa to exploit full optimization potential

COMMON FAILURES

Short-term thinking undermining mid-term performance

Hair cut without analysis and focus

Lack of management commitment and decision making

Sustainability and cost control

Strict project management and timing

39%36%35%

35%

25%

18%

Management commitment and perseverance

SUCCESS FACTORS

Incentive system and involvement of employees

Optimized procurement and tendering process

Strict monitoring and reporting system

Process improvement and IT investment

Targeted approach

Mid-term thinking

46%39%

39%

27%24%

24%

20%

22%

15%

15%Professional implementation

Management commitment is key to drive through changes

28

PROCESS IMPROVEMENTEnsure a structured approach with overall commitment

5


RECIPE: FOLLOW COMMON SENSE FOR THE FUNDAMENTALS

Most of the banks have undertaken process improvement programs along with cost cutting measures, as can be seen in Figure 22. Around 50% relied on well-established methodologies such as LEAN or Six Sigma. These are typically introduced with the help of external consultants, who also followed through the implementation process after the initial process design was finalized. Furthermore, some banks developed decent internal capabilities for structured process optimization.

Irrespective of the methodology, common sense and pragmatism are crucial fundamentals of the key success factors of process improvements. Due to existing authority levels and silo thinking within the respective branch of the organization, companies have a tendency to overcomplicate their processes already during the design phase. Typically, they create unnecessary steps and handovers points between departments where most of the discrepancies and bottlenecks to the processes occur. This happens because planning starts from the as-is premises instead of re-thinking the current situation in terms of process design. Taking a step back, thinking through the processs purpose and the way to use minimum effort with maximum level of digitalization and automation will suffice to enable the design of efficient processes.

Figure 22. Conducted process improvement programs [% of mentioned]

Ad hoc process adjustment

18%

16%

12%4% 6%

12%

31%

Inhouse solution

Groupmethodology

LEAN &Inhouse

Six Sigma

LEAN & Six Sigma

LEAN

Standard methodologyInternal methodologyNo standardized project

> The two most common fields that were addressed are the loan approval and the current account opening process

> Other common fields to be optimized are PMO, digitalization and different workflows

> Recently many group level programs are running to optimize the most relevant branch processes

> The majority of managers appreciated the structured and focused approach of the standardized methodologies

> However, many of them think that with common sense and commitment similar results can be achieved

> The mindset change, IT developments and the sustainability of projects are the key challenges

> Whether the group level large projects met the expectations is a question of belief since the qualitative results are not entirely visible yet

Opinion/Experience Typical fields

IT support is essential for almost all of the processes within a retail bank. Usually, data input is required to proceed to the next step in a given process, which must be handled by IT. The automation of these inputs will be the key driver to cut down the process time. Also, users tend to make assumptions about system capabilities (e.g. SAP) without having the required level of knowledge. Therefore, the inclusion of IT in process design is imperative for the optimization to yield the desired results.

Learning from other industries: LEAN concepts

29

IT SYSTEMSFrom a simple enabler to business driver

6


TAKING THE DRIVER SEAT: CHANGE FROM BEING AN ENABLER

Traditionally, IT was considered an enabler at retail banks. However, today it is an irreplaceable business driver.

With the shift towards online channels and digital marketing, the need to understand clients better and to have an efficient reporting system, IT has become essential for banks to build a true competitive edge in their market.

By realizing the importance of this shift, some banks have recently started to consider (re)insourcing some IT functions. As can be seen in Figure 23, better quality control and the preservation of IT know-how helps them to provide state-of-the-art customer experience in both online and offline channels.

Investments in IT are an investment in the future. Most banks have realized this as IT expenditure was the only large cost block which has not been seriously cut back. In a world where customer experience standards are set by companies such as Apple and Amazon, customers want to have information accessible immediately, products that work the way they are supposed to and want to be treated with high flexibility. Customers transfer these standards to other industries; therefore, to satisfy them banks need to elevate their service level to the same stage. IT will remain one of the key dependencies on this road.

Its also important to mention that the majority of the banks which reported to have cut back on their IT budget in the first years of the crisis, revealed by 2013 that this is not sustainable in the long-term it is just postponing the problems.

Figure 23. Perceived importance of IT [% of respondents]

IT as efficiency bottleneck in 2008 "Level of IT investments and benefits"

Relatively limited IT investments IT is considered still as an efficiencybottleneck

Reasonable above average investments benefits are already seen

Above average investments results still to come

54%Yes

15%

26%35%

24%

IT is coming a real business driver

30

CULTURAL CHANGEIncorporated cost consciousness

7


BE THE CHANGE: IMPLEMENT AN EFFICIENCY IMPROVEMENT MINDSET

There are four components to ensure employees shift to an efficiency improvement mindset, as can be observed in Figure 24. These components are closely linked to the previously discussed six factors to improve operational excellence.

As we learned in case of the factor Transparency, the efficiency related KPIs have significantly gained importance at retail banks throughout the CEE region. As employees get used to being measured against these KPIs, it will become their habit to think efficiently. Secondly, a strong central PMO can help foster the efficiency improvement mindset. PMO members tend to lead project teams where they have the authority to set an example for members and spread the mindset. Thirdly, in the entrepreneurial environment where hypotheses are often tested and experimenting is allowed to achieve efficiency improvements, employees will tend to internalize the culture. The task of a bank is to provide the entrepreneurial environment.

Figure 24. Key success factors to foster an efficiency improvement mindset

U

MONITORED Based on group initiatives Sales Force Effectiveness programs were launched across the region

DEFINED The importance of business KPIs increased providing goals even on Relationship Manager level

EXTENDED Measurement of client satisfaction level has been added to KPI systems

FUNCTIONING KPI & INCENTIVE SYSTEM PMO IN DRIVING SEAT1)

FREQUENT As environment is rapidly changing, many small projects are launched on a regular basis to contest new hypotheses

FREE Brainstorming and experimenting is incentivized to ensure flexibility and fast implementation

FRUITFUL The mindset change is built in the processes to strive for continuous improvement

1) Utilized PMO at the banks. Multiple answers were possible 2) For large scale projects external providers are utilized

TEST & LEARN CULTURE

PROFESSIONAL Trend towards professional PMO capabilities2) As a first step group level teams were created

PROACTIVE As the number of projects are increasing, the need for proactive, centralized steering emerges

DEVELOPED Banks invested (and plan to invest) into CRM capabilities (both analytical and operational)

UTILIZED The knowledge on customer needsdefines the entire service level provided to customers

UPDATED Activities to understand the needs of different customer groups have intensified (e.g. market surveys)

TEST & LEARN CULTURE

12

3

73%39% 30%

Admin. PMO Prof. PMO External PMO

Furthermore, a better understanding of customer needs allows employees to come up with better, more efficient and cheaper ways to service them than ever before ultimately leading to an improved overall customer experience.

Strict PMO fosters additional changes

33

PART III

SUMMARY AND OUTLOOK Seven key areas to further improve efficiency

33

34 SUMMARY AND OUTLOOK

SUMMARY OF FINDINGS

As a result of the prolonged financial crises and changed market conditions, one-fourth of banks lost their profitability in the CEE region, which triggered the banks to systematically analyze all improvement potentials.

Seven key areas have been identified with significant improvement potentials:

1. STRATEGIC FOCUS SHIFT FROM PRODUCT CENTRIC SETUP TOWARDS A CLIENT AND CHANNEL FOCUSED ORGANIZATIONAL MODEL

The rapid growth of loan products, characterized by the pre-crisis era resulted in a product centric approach and the isolated treatment of clients by different organization units. With deteriorating loan portfolios individual client relations have become more important at the same time digital channels reached maturity to become more independent. A clear client and channel centric operation is envisaged for the future with standardization and simplification of the portfolio.

2. GOVERNANCE MODELS CENTRALIZE TASKS IN ORDER TO STRENGTHEN CONTROL ON ALL LEVELS

On stakeholder level, governance model changes were triggered by acquisitions/mergers, while nationalization and preparation for privatization of distressed banks increased the tempo of changes towards stricter control. Meanwhile, closer monitoring and increased reporting requirement from local organizations and a shift towards micro management characterizes holding structures. Local organization en-tities face increasing centralization on head office and branch level, and a move from regional organization towards a divisional setup to improve flexibility and reaction time. Cooperation models are also undergoing a change in direction: the outsourcing trend stopped and partial re-insourcing of activities (IT, Call center, Collections) is typical, while cooperation with retailers and insurance companies became stronger.

3. TRANSPARENCY INCREASE GRANULARITY AND FREQUENCY OF REPORTING

Monitoring systems are significantly gaining importance to facilitate fact-based decision making and enable managerial dialogue to gather bottom-up information within and across subsidiaries. The importance of efficiency KPIs and reporting frequencies increased, while KPI systems are to become more automated, better integrated and the emphasis will shift towards profitability and efficiency indicators.

4. RIGHTSIZING BALANCE TOP-DOWN AND BOTTOM-UP APPROACH TO ENSURE SUSTAINABLE EFFICIENCY

Across CEE, banks have performed a great variety of operational rightsizing programs to adjust their capacities. The most significant reduction of FTEs was carried out in the branch network and sales management, while CRM, contact center and risk areas

CEE banks systematically adjusted their operations

35SUMMARY AND OUTLOOK

> Have a transition strategy! Transform your organization be able to react faster to changing market conditions

> Predefine your strategic focus! Be proactive in client relations, has a balanced, complementary set of channels, and master the art of creating attractive yet efficient product portfolio

> Adjust your governance model! Reevaluate the tasks, functions and organization (e.g. outsource/insource, centralize/decentralize) in the light of your strategic focus. Design the Board efficiently with strong control functions

> Create transparency! Further automate and integrate your KPI systems with built in incentives

> Be cost conscious! Continuously adjust your capacities to the actual strategic requirements using a balanced top-down/bottom-up approach

> Continuously improve your processes! Use a structure, systematic methodology to optimize all crucial business processes

> Recognize IT as a business driver and incorporate efficiency in the corporate mindset!

increased capacities. Concerning cost reduction: marketing and travel costs were major areas of cost reduction, while IT related functions are expected to increase their cost base. In all rightsizing projects, Management commitment is perceived to be the most important success factor.

5. PROCESS IMPROVEMENT ENSURE A STRUCTURED APPROACH WITH STRONG COMMITMENT

The majority of managers appreciated the structured and focused approach of the standardized methodologies. The mindset change, IT developments and the sustainability of projects are the key challenges to realize sustainable process improvement. The two most common fields that were addressed are the loan approval and current account opening processes.

6. IT SYSTEMS CONSIDER IT AS A BUSINESS DRIVER WITH SIGNIFICANT BUSINESS VALUE AND COST REDUCTION POTENTIAL

The approach towards IT systems has significantly changed after the crisis - IT has turned from a bottleneck into a real business driver. The level of IT investments is expected to increase in the future and the trend is to partly insource recurring IT developments. The frugal IT approach which transforms the relationship between Business, IT and Finance gains importance and results in cost reduction, while increasing business value and ensures faster time-to-market.

7. CULTURAL CHANGE INCORPORATE COST CONSCIOUSNESS

Efficiency improvement measures can only sustain with the appropriate mindset from all stakeholders. Key influencing factor of the mindset change is the development of a functioning incentive system, the fostering of a test & learn corporate culture, enhanced by professional PMO capabilities.

Figure 25. Summary of key recommendations to reach operational excellence

37

APPENDIX

37

38 APPENDIX

NORTH CENTRAL EUROPE (NCE)

ROE [%] NPL [%]

21.7

21.7

23.6

14.1

08

16.7

25.8

13.3

6.5

09

16.3

21.9

13.7

12.3

10

16.1

19.3

14.6

14.2

11

16.1

21.4

14.3

9.1

12

14.6

20.6

12.5

7.8

13

4.1

3.3

4.7

3.2

08

6.3

5.2

7.1

5.5

09

7.2

6.5

7.8

6.1

10

6.9

6.2

7.5

5.7

11

7.7

6.2

8.8

5.3

12

7.5

6.1

8.6

5.2

13

CENTRAL EUROPE (CE)

ROE [%] NPL [%]

14.6

17.0

15.2

8.1

08

6.6

2.9

10.1

3.9

09

0.1

-1.7

2.3

-2.4

10

-3.9

-2.6

-1.7

-11.7

11

-7.4

-5.9

-3.8

-19.0

12

-2.8

1.3

4.5

-31.613

3.2

2.8

3.0

4.2

08

6.6

7.9

5.9

5.8

09

9.3

11.9

7.8

8.2

10

12.6

14.3

11.5

11.8

11

15.8

18.2

13.7

15.0

12

18.9

21.9

14.0

22.0

13

APPENDIX

Below is the further detailed breakdown of the CEE region into the analyzed sub-regions and individual countries with similar patterns in terms of return on equity and non-performing loan share development for the 2008-2013 period.

Figure 26. Banking market return on equity and non-performing loans: North Central Europe

Figure 27. Banking market return on equity and non-performing loans: Central Europe

39APPENDIX

SOUTH EASTERN EUROPE (SEE)

ROE [%] NPL [%]

4.3

12.5

9.9

9.3

20.5

6.4

0.8

6.4

4.6

9.3

5.3

-5.5

6.5

5.4

6.7

6.3

5.8

6.9

6.0

5.8

5.0

5.0

4.8

4.7

5.3

3.3

3.9

1.3

3.8

5.3

4.9

3.1

4.9

11.3

2.4

8.3

5.9

7.8

15.8

6.1

12.4

11.4

11.2

16.9

11.9

14.3

11.9

12.4

19.0

14.9

15.5

13.5

13.8

18.7

16.6

16.9

14.9

15.6

21.2

16.9

08 09 10 11 12 13 08 09 10 11 12 13

EASTERN EUROPE (EE)

ROE [%] NPL [%]

12.8

13.3

08

1.1

4.9

09

10.3

12.5

10

15.5

17.6

11

17.0

18.2

12

13.7

8.5

-32.5-10.2 -5.3

3.0 0.1

14.9

13

4.2

2.5

08

9.0

6.2

09

9.2

42.1

5.7

10

8.2

5.0

11

7.4

4.8

12

7.0

17.6 33.739.8 37.3 37.5

4.3

13

Figure 28. Banking market return on equity and non-performing loans: South Eastern Europe

Figure 29. Banking market return on equity and non-performing loans: Eastern Europe

40



The key objective of the study is to provide a regional insight on changes of operating models

> 88% of the interviewees were Board Members, half of them CEOs

> Surveyed banks cover over 30% of the market in terms of total assets

> 40% average market share coverage among the 12 participating countries

> More than 40% of the market leaders participating in the corresponding countries

North Central Europe Eastern EuropeCentral Europe South Eastern Europe

Roland Berger has conducted representative interviews among top managers of CEE major banks with Efmas continuous support, that built the backbone of this study on the operations and governance model changes of retail banks to counter the crisis. The key objective of the study was to provide a regional insight on retail banks operating model changes, as well as to provide a base of comparison for regional players in CEE. The main topics covered in the study were the following:

> What are the key characteristics of banks operation/governance models in CEE in the retail segment? > How did the importance of client segments and channels evolve? > Which of the models can be considered as a best practice? > How could banks achieve their goals with operational optimization and governance change? > What are the key lessons learned from the transition, and which are the most difficult to implement? > What are the expectations and plans for the future?

The Benefit of the crisis: Gaining efficiency study was completed with the involvement of 60 major banks active in the CEE regions 12 countries, namely Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, Slovenia, Serbia and Ukraine.

Figure 30. Study sample highlights and countries in scope

As the methodology outlined in Figure 30., the first step was to define the scope and required data about the banks operating and governance model changes, which was jointly conducted by Roland Berger and Efma. As a second step, the survey guide-book was compiled which was used by all interviewers and data collectors. The data collection was completed by Roland Berger through face-to-face interviews with top mangers and board members.

41METHODOLOGY AND SCOPE OF THE STUDY

Frame & indicators definition

Data collectionData analysis & key learnings Report writing Communication

Figure 31. Study methodology

In the third step the collected data and information was analyzed. Then the preliminary findings and conclusions were determined and compiled in a preliminary report, which provided the base for the final Efma report. As a final step the Benefit of the crisis: Gaining efficiency report got published and communicated by Efma in October 2014.

Efma provided continuous support during the entire report writing process. They played a crucial role as facilitator in organizing interviews, providing contacts and often acting as an intermediator between Roland Berger and the banks. The conducted interviews with top managers serves as representative sample of the CEE retail banks operating and governance model practices.

42

ABOUT US

Efma

As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries. With a membership base consisting of almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through working groups, online communities and international meetings.

Visit www.efma.com

Roland Berger Strategy Consultants

Roland Berger Strategy Consultants, founded in 1967, is the only leading global consultancy with German heritage and of European origin. With 2,400 employees working from 36 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners. Roland Berger Strategy Consultants has also made a name for itself beyond the standard consulting business, establishing itself in the field of research and development. Numerous studies on current business and management issues bear the companys logo.

The Roland Berger Strategy Consultants Academic Network, an association established in 1998 and comprising various universities, puts the company at the core of a continuous exchange of theoretical and practical knowledge. In addition, Roland Berger sponsors, chairs at several universities and publishes the Roland Berger Strategy Consultants Academic Network and the Papers on European Management series.

Visit www.rolandberger.com

ABOUT US

44

Many thanks to the following persons for collaborating in the production of this study:

Roland Berger Partners, Principals, Project Managers and Consultants who helped collect the data with the participating companies: Przemyslaw Vonau, Nikita Ponomarev, Roland Zsilinszky, Codrut Pascu, Vladimir Preveden, Adrian Weber, Ioana Leaua, Alexander Klimov.

Furthermore, we would like to thanks for providing their insights, industry expertise and overall guidance:From Efma Patrick Desmars, Lubomir Olach and Lukas DzuroskaFrom Sberbank Europe AG Andrs Hmori.

Roland Berger Financial Services team for analyzing the data and writing the study: Frigyes Schannen, Ivn Radnai, Johanna Jrai, Kristf Schum, Balzs Zoletnik, kos jlaki and Dvid Sos.

Retail Banking in CEE - The Benefit of the Crisis_ Gaining Efficiency

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