OPPORTUNITIES AND HURDLESDEBT COLLECTION IN TIMES OF CRISIS

RETAIL BANKING IN CEER

ETA

IL B

AN

KIN

G I

N C

EE –

DEB

T C

OLL

ECTI

ON

IN

TIM

ES O

F C

RIS

IS

PREFACE

FOREWORD VOLKSBANK INTERNATIONAL AG

SUMMARY OF KEY FINDINGS

PART I – THE "GOLD RUSH" IS OVER – RECENT DEVELOPMENTS AND OUTLOOK ON CEE RETAIL LENDING

Economic decline and stagnating credit markets

Deteriorating credit-portfolio quality – Rise in non-performing loans

Outlook

PART II – RETAIL DEBT COLLECTION IN TIMES OF CRISIS

Experiences with debt collection during the financial crisis

Main pillars of best practice debt collection

PART III – OUTSOURCING AND DEBT SALE

Outsourcing

Debt sale

CONCLUSION FOR CEE BANKS

METHODOLOGY AND SCOPE OF THE STUDY

ABOUT US

CONTENTS

CONTENTS

3

5

6

9

17

33

39

43

45

1

PREFACE

3PREFACE

Prior to the financial crisis, CEE banks focused on growth and retail lending was expanding vastly. As the crisis hit theregion, credit markets froze and credit growth even turned negative in some CEE countries. Following the economicstagnation, banks throughout CEE saw non-performing loan (NPL) levels soar. Having been a rather unnoticed areaduring boom times, debt collection was spotlighted suddenly and turned out to be a key lever to maintain the banks'profitability.

Given the increased importance of collection in CEE, the European Financial Marketing Association (Efma) and Roland Berger Strategy Consultants, kindly supported by Volksbank International, conducted a study on debt collectionin the CEE region. The objective was to compare regional players' practices and to identify key success factors andimprovement potential in managing distressed debt.

The report at hand contains the study results and provides an insight into how credit institutions in CEE handle thecollection of bad debt in their retail portfolios, covering the following topics:

1. The impact of the financial crisis on retail lending and loan portfolio quality across CEE countries and an outlookon the expected developments

2. An insight into the debt collection practices of banks across CEE covering processes, organizational setup, performance measurement and supporting systems

3. An overview of CEE banks' current outsourcing practices concerning collection activities and debt sale

For the study, managers of regional and local banks all across CEE were interviewed. These findings were combinedwith the market knowledge of Roland Berger and the insights obtained during numerous projects in the region.

It is our hope that this report will support you and your organization in assessing your debt collection practice, in identifying improvement potential and consequently better coping with the changed business environment in CEE.

THE EUROPEAN FINANCIAL MARKETING ASSOCIATION (EFMA) AND ROLAND BERGER STRATEGYCONSULTANTS HAVE UNDERTAKEN A STUDY ON RETAIL DEBT COLLECTION IN THE CEE REGIONTO COMPARE CEE BANKS RETAIL DEBT COLLECTION AND IDENTIFY BEST PRACTICES ANDIMPROVEMENT POTENTIAL.

Hendrik Bremer

Partner

Roland Berger Strategy Consultants

Patrick Desmarès

Secretary General

European Financial Marketing Association

FOREWORD

The financial and economic crisis hit the CEE region in late 2008 with the effect, that the regional credit marketschanged dramatically – and will never be like they were before.

Before the crisis there was only one goal: growth in credit volumes and market shares. Setting up a well functioningdebt collection system was not seen as a topic of prior importance and often investments in this sector have beenneglected. In the course of the financial crisis the fast growing retail lending market in the CEE came to a sudden halt,and debt collection was catapulted into prominence. Driven by overdue debts, banks started to shift internal capacitiesfor portfolio health checks and the awareness for the need of proper collection processes rapidly increased.

Also for Volksbank International debt collection became an extremely important area of operations, with regard to bothcost and profitability. Health checks in some CEE countries already showed clearly that debt collection is of great valuefor the bank and needs further improvements. That's why we see the consequences of the financial crisis also as anopportunity to identify weaknesses and to improve processes.

For the further development of CEE credit markets Volksbank International is optimistic: first indicators already showthat business is starting again. But recovery will be shaky and full of hurdles. So for banks well functioning collectionprocesses will be a main success factor for the next years. Only they guarantee that the time of disproportional risks isover once and for all. That is why Volksbank International supports this publication.

We trust that the report will fuel discussion of the most important aspects of debt collection in the CEE region andhelp readers identify how best to maintain bank's profitability.

VOLKSBANK INTERNATIONAL AG

Dr. Friedhelm Boschert

Chairman and CEO

Volksbank International AG

5FOREWORD

Due to the financial crisis, the previously strong retail lending growth in CEE came to a sudden halt. While credit markets froze, banks saw non-performing loan (NPL) ratiossoar as the economic situation in Central and Eastern Europe deteriorated. Eventhough economies stabilized in the meantime and the crisis appears to be over, NPLsare expected to remain at an elevated level at least in the medium term. In view ofthese developments, debt collection has turned from a rather unnoticed area into oneof the key levers to maintain CEE banks' profitability. The comparison of CEE banksregarding their collection processes, organizational setups, performance measurementpractices and support infrastructures shows noticeable differences. They indicate someplayers' room for improvement to catch up with the region's best-practice banks.

COLLECTION PROCESSESThe sophistication level of collection strategies differs highly across CEE banks: prac-tices range from almost no differentiation to large sets of processes and sub-processes.Most commonly, CEE banks differentiate processes according to easily assessable cri-teria such as product and client segment. Advanced approaches like behavioral ana-lytics are not yet utilized widely (only by approximately one third of the banks).

The most common means of communication have been phone and letter. Cost-effectivenew tools like SMS and e-mail, however, are used already by two thirds of the banks,mostly in addition to the traditional channels. Surprisingly, while heavily relying onphone contacts, only one third of the surveyed CEE banks command advanced call-center technology. Here significant efficiency improvement potentials are untapped,considering that e.g. a participant from Central Europe reported a 40% productivity in-crease of phone collection staff after the introduction of a predictive dialer technology.

ORGANIZATIONAL SETUP AND CAPACITYAlmost all surveyed CEE banks steer and perform most of their retail collection activities from their head office. Roughly one third has additional collection units onregion resp. branch levels – mostly used for field collection and for collection from specific customer segments or exposure levels. The specialization level of collectionunits varies. Many CEE banks have units dedicated to specific client segments, withmore than two thirds using collection units dedicated to individual as well as microclients. Often the units are even further differentiated, e.g. according to collectionphase and resp. or product. One third of the banks have combined units for micro andindividual clients and overall show less specialization in collection.

Depending on the level of automation and outsourcing, staff capacity differs stronglybetween the banks. The majority of CEE banks, however, employ 2.7-6.0% of theirstaff in collections. With urgent need for additional collection capacity, most banksincreased their collection staff during the crisis, often while running staff cost reductionprograms in other areas. To boost their collection capacity not just in terms of numbersbut of experience, various banks used unorthodox methods – e.g. some Romanian players recruited experienced staff from leading mobile phone operators known fortheir strong collection practice.

SUMMARY OF KEY FINDINGS

Non-performing loan levels areexpected to remain elevated also inthe medium term

In collection, best practice banksuse large sets of differentiated processes and latest technology

SUMMARY OF KEY FINDINGS

6

PERFORMANCE MEASUREMENT AND INCENTIVE SCHEMES Adequate performance measurement and incentive systems are key drivers for im-proving the collection performance. Today approximately 70% of the CEE banks use variable compensation and roughly 15% plan to introduce it for their collection staff.While the number of KPIs to measure the performance differs widely across CEE(majority of banks using between one to five KPIs), there is one clear favorite indicator:"cash collected" in either absolute or relative terms. To determine the actual compen-sation level, more than half of the CEE banks assess individual as well as collective performance (e.g. department or unit results). Additionally to the staff performance,best-practice banks in CEE measure the effectiveness of their processes and strive to continuously improve their collection strategies. For instance, they apply the "champion-challenger principle" to objectively compare different collection processesand to consequently chose the most effective one.

SUPPORT INFRASTRUCTUREData systems are the backbone of collection: on the one hand, specialized IT providesthe required information and analytics and on the other hand, standard procedures canbe automated so that the staff is able to focus on key issues. Systems used in CEE rangefrom products by different international providers to various in-house developments.Standard functionalities such as basic customer information, contact history or initialloan data are provided by most of the IT solutions in place, more specific functional-ities, however, are not available to all the banks. While approximately 60% operatewith collection-related performance measurement or automated call-center functional-ities, collection scorecards or behavioral scoring are covered in roughly 35% of thecases only. During the crisis, IT systems proved to be a weak spot in many banks – congruously roughly 20% of the surveyed companies are introducing or upgrading theircollection software now.

OUTSOURCING OF COLLECTION AND DEBT SALEThe share of banks considering debt sale has significantly increased since the crisis:79% of the surveyed banks are selling or planning to sell delinquent debt, albeit soldvolumes remain rather low. Most CEE banks sell debt to reduce risk resp. to managethe balance sheet. Or it works as last resort if no or only low recovery can be expectedor alternatively as a strategy to quickly free up resources.

Outsourcing depends on the collection phase. During the financial crisis, however, theoverall willingness to outsource has grown for all collection phases as delinquenciesincreased. Early collections including most of the easy-to-solve cases are mostly handledin-house – only 35% of banks use or plan to use the support of collection agencies. Inlate collection, more than two thirds of the banks, however, outsource at least partially.Due to long procedures and a usually limited recovery, banks try to avoid legal collecti-on; if necessary, more than half of them handle it in-house. While the majority of CEEbanks use outsourcing to increase cost efficiency and effectiveness of collection, someof them bridge internal capacity constraints with third parties that way.

During the crisis data systems oftenproved to be a weak spot – manybanks are introducing special soft-ware now

Two thirds of the banks outsourcelate collection at least partially

7SUMMARY OF KEY FINDINGS

ABOUT US 45

ABOUT USEfmaThe European Financial Marketing Association has been a constant observer of themany changes within the retail financial services sector over the years. It has alsodemonstrated its ongoing commitment to providing information, help and advice bydeveloping a forum for professionals throughout the sector.

Efma is a non-profit making association, formed in 1971 by bankers and insurers toencourage their colleagues to share experiences; to promote the best practices of theirinstitutions; and to collaborate through alliances and partnerships. Today, its membersinclude over 80 per cent of Europe’s largest retail financial institutions.

Through regular events, councils, detailed studies, its journal and its comprehensivewebsite, the association provides retail financial service professionals with answers totheir questions. These include the main issues that affect their business: multi-distribu-tion strategies; customer relationships; product and service marketing; risk manage-ment; operational excellence and many other topics.

Efma is above all a dynamic association, providing a great opportunity for discussionand the exchange of ideas without any commercial constraints. For the past 40 years,the loyalty of its members (representing over 3.000 brands) and their continuing finan-cial support is the most powerful proof of its efficiency and effectiveness.Visit www.efma.com

VOLKSBANK INTERNATIONAL AGBack in the year 1991, Volksbank AG (VBAG) became one of the first banks to initiatean expansion drive in the promising Central and Eastern European growth markets,setting up a subsidiary bank in Slovakia.

Today, Vienna-based Volksbank International AG (VBI), of which a majority sharehold-ing is owned by VBAG, manages a successful Bank Network consisting of some 550sales outlets in 9 Central and Eastern European countries: Slovakia, Czech Republic,Hungary, Slovenia, Croatia, Romania, Bosnia-Herzegovina, Serbia and Ukraine. It en-compasses some 570 sales outlets with more than 5,300 employees, which togethermanage some 1,500,000 customer accounts. In November 2010, the total assets ofthe VBI Group amounted to EUR 13.7 billion

VBI's banking activities focus on small and medium-sized businesses as well as retailbanking customers, project financing and referral business. Standardised products andprocesses ensure a unified quality of service in the Central and Eastern European mar-kets.

Since the end of 2004, both DZ BANK AG/WGZ BANK AG and Banque PopulaireCaisse d'Epargne (BPCE) of France have each held a 24.5% shareholding in VBI.Visit www.vbi.at

ROLAND BERGER STRATEGY CONSULTANTSRoland Berger Strategy Consultants, founded in 1967, is one of the world's leadingstrategy consultancies. With 39 offices in 27 countries, the company has successfuloperations in all major international markets. In 2009, it generated approximatelyEUR 616 million in revenues with 2,000 employees. The strategy consultancy is anindependent partnership exclusively owned by about 200 Partners.

Roland Berger Strategy Consultants has also made a name for itself beyond the stand-ard consulting business, establishing itself in the field of research and development.Numerous studies on current business and management issues bear the company'slogo. The Roland Berger Strategy Consultants Academic Network, an associationestablished in 1998 and comprising various universities, puts the company at the coreof a continuous exchange of theoretical and practical knowledge. In addition, RolandBerger sponsors chairs at several universities and publishes the "Roland Berger StrategyConsultants Academic Network" and the "Papers on European Management" series.Visit www.rolandberger.com

We thank the following people for collaborating in producing this study:

Roland Berger Financial Services team for analyzing the data and writing the study:Hendrik Bremer, Artur Perotti.

Roland Berger Partners, Principals, Project Managers and Consultants who helped uscollect the data with the participating banks:Johannes Boerner, Jan Bures, Valeria Chisca, Krisztian Farkas, Andreas Feichter, Natalia Geraschenko, Ariel Gorelik, Konstantin Kinsky, Wojciech Michalowski, Codrut Pascu, Frigyes Schannen, Andreea Stan, Marcin Trebicki, Alexander Voronov.

Patrick Desmarès and Lubomir Olach, our partners within Efma, and Joerg Langnerfrom Volksbank for providing their insights, industry expertise and overall guidance.

47

© Roland Berger Strategy Consultants, Efma2011, all rights reservedwww.rolandberger.comwww.efma.com

RET

AIL

BA

NK

ING

INC

EED

EBT

CO

LLEC

TIO

NIN

TIM

ESO

FC

RIS

IS