ProCredit Group

Socially responsible and sustainable lending to small businesses

January 2014

A strong banking group

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The World of ProCredit (1)

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>2 m clients in 22 countries: - very small, small and medium companies

- Private clients with low and medium income

Latin America24% of total assets

Africa4% of total assets

Eastern Europe72% of total assets

A group with a unique market position

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Microfinance institutions

Large, publicly listed banks

Target group orientation:

•Focusing on SMEs

•Long-term relationships with clients

•Responsible banking

•Investment loans instead of consumer loans

•Highly effective credit technology

•“Green finance”

Application of international standards:

•Regulated by BaFin

•MaRisk

•IFRS

•Basel regulations

Double Proportionality: an important convention in the German regulation

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1. The internally designed processes (ICAAP) of

the bank need to be proportional to its size,

risk structure and business volume.

2. The frequency and the intensity of the

examination of the ICAAP through the regulator

(SREP) needs to be proportional to its design.

Internal Capital Adequacy Assessment Process (ICAAP) Processes designed to: -identify-assess-control and -report the risks of the institutes to the regulator.

Minimum requirements for risk management (MaRisk)

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Type of business

Credit business Trading business

Counterparty risks

Market price risks

Liquidity risks

Operational risks

General Requirements

• Banks must implement an

appropriate and effective risk

management within their risk-

bearing capacity and in

accordance with their strategy

Therefore, banks are expected to:

• Identify

• Assess

• Treat

• Monitor and

• Communicate material risks

• Principle of risk-relevance

• Principle of segregation of duties

ProCredit Academy (Fürth, Odenwald):

•Training of future senior management (3 years)

•English training

Regional Academies(Macedonia & Colombia):

•Training of middle management (1 year)

•Short-term trainings on specific topics

Bank training centres: Systematic, intensive on-the-job training: mathematics, accounting, specialist topics

Company-wide salary structure which links professional development and salary levels to performance and training level

All potential new recruits participate in a six month Young Bankers Programme before being hired

ProCredit approach to staff development

The ProCredit International Academy in Germany

The ProCredit Regional Academy in Colombia

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ProCredit Group – Loan portfolio development

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Loan portfolio development by currency

40.7% 39.9%

25.4% 24.3%

33.9%

35.8%

33.9%

34.1%

34.4% 34.4%

34.9% 34.9% 35.0% 34.9%35.1%

35.2%

35.4% 35.5%

35.8%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

EU

R m

EUR USD LC LC as % of Total LP

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17.5% 15.0%

29.0% 30.5%

22.6% 22.4%

15.7% 17.2%

15.2%15.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

EU

R m

up to EUR/USD 10,000 from EUR/USD 10,000 up to 50,000

from EUR/USD 50,000 up to 150,000 from EUR/USD 150,000 up to 500,000

above EUR/USD 500,000

as % of Total

9.6%

-0.8%

5.3%

-14.0%

-1.3%

Growthrate (yoy)

Business loan portfolio development by size (exposure)

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Steady development of diversified loan portfolio

89.6%90.4%

91.8% 92.4% 92.9%

6.6%

6.2%

5.1%4.9% 4.9%

3.8%

3.4%

3.1%2.7% 2.2%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

EU

R m

Business loans Housing loans Other

17%

33%

17%

4%

9%

20%

Outstanding Business LP by Sector: December-2013

Agriculture

Trade

Industry andother productionConstruction

Transport

Other

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Financing medium and long-term growth: Business loans by maturity (volume)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

up to 12 months 12-24 months 24-60 months over 60 months

As % of total business loan portfolio (not including business overdrafts)

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Customer credit risk

4.8%

3.5%

7.1%

4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Eastern Europe Latin America Africa All Banks

Portfolio at risk above 30 days (PAR 30)

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PAR 30 and PAR 90 Coverage ratio

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

220%

0

20

40

60

80

100

120

140

160

180

200

220

LLP PAR 30 PAR 90 Coverage ratio PAR 30 Coverage ratio PAR 90

Coverage ratio PAR 30 & PAR 90

101%

129%

EUR m

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Key elements of lending to business clients

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Our business clients

• From family-owned and – run small scale business activity, agricultural activities to medium-sized businesses

• Virtually no audited financial statements, tax declarations often with only modest value for assessment of financial performance of the activity

• Relatively high degree of volatility - frequent changes in the business model

• No start-ups, clients are experienced entrepreneurs

• Social and environmental exclusion list

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Very small business clients• Typically relatively informal family

businesses• Limited financial literacy – clients typically

assess success cash-based

Small and medium business clients

• Increasingly formalized businesses, stronger corporate governance structures and risk management capabilities

Our approach to lending

Value-driven strategy

• Transparency

• Open communication

• Social responsibility and tollerance

• Service orientation

• High professional standards

• High degree of personal integrity and committment

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This translates into…

• Focus on core business

• High degree of diversification, transparency and simplicity

• Carefull staff selection and intensive training

…and lending operations that base on

• Group standards with local adjustments

• Know your client, building a long-term relationship with our clients

• Individual approach, thorough assessment

• Decentralized decision-making

• Avoidance of over-indebtedness of the client

• Rigorous arrears management

BACK OFFICEFRONT OFFICE

FRONT OFFICE

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Business Department

Credit Risk Department

Segregation of duties in lending processes

Branch level

Head office level

Very Small credit exposures Small/Medium credit exposures

Member ofManagement Board

(Business)Member of

Management Board (Risk)

Business Department

Member ofManagement Board

(Business)

Legal aspectsLegal set-up of the business, signature rights, status of collateral, anti-money

laundering check

Collateral Solid collateral, appropriate coverage of the exposure

Qualitative aspects

Assessment of the client’s character, willingness to enter into a long-term

relationship, ownership/management, market position, credit history

Quantitative aspects

Solid financial assessment (liquidity & net working capital, cash conversion

cycle & financing of current assets, equity, profitability, determination of

payment capacity)

Investment Rationale for the investment plan, expected effect on the business

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We focus on basic elements of credit risk assessment

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Main buffers incorporated in credit risk assessment

Collateral

•Conservative determination of fair market value and collateral value

•Coverage ratios depending on maturity and risk profile of the client

Investment

•Conservative assessment of positive impact of the investment on the activity

•Full costs are taken into consideration

Payment capacity

•Conservative determination

•Addresses assessment risk due to informality of clients

•Reduces impact of potential future volatility of business activity and/or markets

Equity

•We require typically an equity ratio of at least 30%

•Structure of equity

Avoids over-indebtedness

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Debt ratio:

The weighted average figure of the medium portfolio’s debt ratio equals 0.47, indicating a rather low level of leverage.

PCB Georgia – examples of key ratios

Medium Business Clients - Loan Portfolio’s Weighted Average Debt Ratio

0.47

Interest coverage ratio (EBIT/Interest):

There are only 4 medium clients (4% of the medium portfolio), whose EBIT does not cover the interest expenses incurred, these are the loans with already identified business problems, two of them are restructured. All of them are well collateralized.

Medium Business Clients - Interest coverage ratio 7.04

Principles for decision-making

All decisions are taken by a credit committee

The possibility for a credit limit is assessed for every client

The adequate structure for the case – product, maturity, collateral

Review of exposure to foreign exchange rate risks

Adequate pricing of the exposure, fixed vs. floating rates

Adjusting payment plan to the seasonality of the activity

The business committee builds the basis for a long-term relationship with the client

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Risk Classification System

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Risk classification system

• MaRisk require that meaningful risk classification systems are to be set-up, at least for risk-relevant credit exposures

• It should include not only quantitative but also, if possible, qualitative criteria

• In the ProCredit group, an expert risk classification system is applied for medium-sized business clients

• Due to the lending strategy, the group‘s loan portfolio contains only a relatively limited number of such clients

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Quantitative RC

Qualitative RC Collateral

RC

Final Risk Classification

Client Risk Classification

Structure of risk classification system • The risk classification system is a supporting tool for the decision-making in medium lending.

• Thew criteria have been selected based on the experience of a group of experts from different ProCredit banks

• Initial back-testing suggests that the system is relevant

• Further conclusions are difficult as the number of observations is too low.

Risk classifications – building for the future

• Preliminary results from the medium loan portfolio indicate that the overall system is appropriate and

effective

• A broadening of the system to small business clients is under development

• Nevertheless, risk classification systems will only be a supporting element in our credit risk assessment

Limited number of observations

Standardized qualitative assessment for the group under development

The basis for assessing quantitative indicators will remain weak

High degree of informality of clients

Volatility of client‘s activities

Limited availability of external/long-term data

Limited default history in our banks

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Risk class 1 2 3 4 5 6 7 8 Total

No. of medium-sized credit exposures

11 122 24 22 20 4 - 2 205

Example of risk classification – PCB Georgia

• Only a minor share of lending clients are assessed through the risk classification system

• Roughly 60% of medium business clients are categorized in the two best risk categories

• Less than 1% of the clients is in the default category

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

1 2 3 4 5 6 7 8

PD - client RC Pool

The back-testing shows (on very few observations) an appropriate distribution of the probability of default for the bank

Collateralization of the loan portfolio

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Valuation methods for immovable collateral items:

•The income approach to valuation – assessment on the basis of the rental income of the collateral;

•The cost approach to valuation – based on the principle of substitution which asserts that no prudent buyer will

pay more for a property than the amount for which the collateral item could be newly constructed;

•The sales comparison approach to valuation – derives value by comparing the subject being appraised to

similar properties that have sold recently through arm’s length transactions.

Collateral valuation

For movable collateral items, basic assessment methods are provided as well.

• Group policies provide a framework for assessing the fair market value and collateral value of collateral items

• Significant immovable items must be appraised by professional appraisers

• The professional appraiser must apply at least two valuation methods to determine the final fair market value

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Fair market value/ Loan portfolio

164%

Collateral coverage ratio indicates, that the given portfolio is secured by collateral by more than 100%.

Uncollateralized loan portfolio

USD 9.7 million

The bank’s loan portfolio to medium

business clients (USD 81 million) is

secured by collateral with a fair market

value of USD 133 million ( of which 93%

immovable collateral)

PCB Georgia - Medium Loans’ Loan to Value Ratio

Collateral value/Loan portfolio

129 %

Michael Kowalski

Head of Group Credit Risk

ProCredit Holding

Frankfurt, Germany

kowalski@procredit-holding.com

+49-69-951437-195

www.procredit-holding.com

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