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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
0.000
1,000.000
2,000.000
3,000.000
4,000.000
5,000.000
6,000.000
7,000.000
0x to
1xE
BITD
A
1x to
2xE
BITD
A
2x to
3xE
BITD
A
3x to
4xE
BITD
A
4x to
5xE
BITD
A
5x to
6xE
BITD
A
6x to
7xE
BITD
A
7x to
8xE
BITD
A
8x to
9xE
BITD
A
9x to
10x
EBIT
DA
over
10x
EBIT
DA
nega
tive
EBIT
DA
ON
-BS
IN T
HO
USA
ND
S EU
R
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
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