world retail banking report 2010

8/3/2019 World Retail Banking Report 2010

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Wor Re B Repor Spec Eo

Small BuSinESS Banking and thE CRiSiS:Managing developMent and risk

2010


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3 Preface

5 PrincipalFindings

7 Introduction

11 Chapter1

TheW inningBank M odelintheSmallBusinessMarket

21 Chapter2

KeyB en ef it softh eWin nin gB an k Mo de l

31 Chapter3

MovingForward:TransformingtheBusinesstoReachtheWinningBankModel

37 Methodology

38 AboutUs

Contents

2010 Capgemini. All Rights Reserved. Capgemini, UniCredit and Efma, their services mentioned herein as well as their respective logos, are

trademarks or registered trademarks of their respective companies. All other company, product and service names mentioned are the trademarks

of their respective owners and are used herein with no intention of trademark infringement. No part of this document may be reproduced or copied

in any form or by any means without written permission from Capgemini.

Dsclm

The information contained herein is general in nature and is not intended, and should not be construed, as professional advice or opinion provided

to the user. This document does not purport to be a complete statement of the approaches or steps, which may vary according to individual

factors and circumstances, necessary for a business to accomplish any particular business goal. This document is provided for informationalpurposes only; it is meant solely to provide helpful information to the user. This document is not a recommendation of any particular approach and

should not be relied upon to address or solve any particular matter. The information provided herein is on an as-is basis. Capgemini, UniCredit

and Efma disclaim any and all warranties of any kind concerning any information provided in this report.


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Capgemini, UniCredit, and Efma (European financial marketing association) are pleased to present this

seventh edition of the World Retail Banking Report. Because the f inancial and economic crisis has had atremendous impact on bank operating models and their ability to handle liquidity, manage risk and compliance,and generate revenue, we have focused this year on evaluating the effect of the global financial crisis and howto deal with it. We especially highlight trends in the small business market, which is a very important strategicmarket for retail banks.

This years study, therefore, investigates the challenge small business banking faces to master risk whileaccelerating business development, which was brought to the fore by the crisis. As detailed in the Methodology,our analysis is based on 58 in-depth interviews with senior executives from leading banks in 21 countries:Austria, Belgium, China, Croatia, Czech Republic, France, Germany, Hong Kong, India, Ireland, Italy, theNetherlands, Poland, Romania, Russia, Slovakia, Sweden, Turkey, United Arab Emirates, United Kingdom,and United States.

Our report provides bankers with an overview of the challenging but critical small business market, proposes awinning model to overcome todays risk management and development challenges, highlights the major benefitsof this model, and suggests practical next steps to reach and implement it successfully.

It is with great pleasure that we publish this 2010 edition of the World Retail Banking Report. We trust itsfindings will help answer key questions and stimulate debate. Most of all, we want to provide useful informationthat helps retail bankers deal more effectively with the difficult operational and strategic issues they will face inthe post-crisis period.

BertrandLavayssire

ManagingDirectorGlobalFinancialServices

Capgemini

PatrickDesmars

SecretaryGeneral

European financial

marketing association

RobertoNicastro

GroupDeputyCEO&HeadofRetailStrategicBusinessArea

UniCredit S.p.A.

Preface


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4 Small Business Banking and the Crisis: Managing Development and Risk


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55

Small Business Banking and the Crisis:

Managing Development and Risk

Principal Findings

The global financial and economic crisiswith theincreasing cost of risk, the drop in demand, and therising pressure on banks to support the economyhashighlighted the major challenge that small businessbankers face: how can they both accelerate businessdevelopment and manage risk?

To cope with this challenge, successful retail bankswill develop along two key dimensions to reach whatwe call the winning bank model (see matrix below):

Move the role of their relationship managers (RMs)towards closer relationships with their clients, a deepunderstanding of each clients needs and expectations,and increased empowerment on risk managementissues, fully in line with policies and practices definedby the risk management department.

Implement an efficient and complete credit

risk management systemcharacterised by anappropriate governance scheme, fully integratedprocesses, and a complete and efficient supportinginformation systemthat meets the highly specificand complex risk management needs of the smallbusiness market.

This model will enable banks to outperformtheir competitors on both development and riskmanagement, by:

Accelerating development through increased clientsatisfaction and the banks ability to cross-sellsuccessfully, thereby supporting revenue generationunder the increased cost-of-risk pressure.

Mastering risk, based on wider usage andsophistication of rating-based scoring tools,strengthened proactive management of performingcredit portfolios, and an improved credit collectionprocess with soft collection.

To reach and implement the winning bank model,successful banks will design an appropriatetransformation strategy (see matrix):

Transformation paths depend on a banksstarting point on both axes, on its original marketpositioning (retail versus corporate), and on itsculture and organisation.

These transformation paths will be a combinationof technical, organisational, and HR measuresimplemented through quick wins, incremental steps,or longer term actions.

To succeed in this transformation, banks will haveto set up robust change-management approaches toachieve alignment with the banks overall strategy,support from senior management, and buy-infrom employees.

Top-Dow,

iTegraTeD ba

Completeandfullyintegratedprocessesandinformationsystem

alignedwithriskmanagementneeds

Incompleteandnotfullyintegrated

processesandinformationsystem

Cdt sk

mnmnt systm

rltnsh mn lLowlevelofempowermenton

riskmanagementand/orlackof

closenessinclientrelationships

Highlevelofempowermenton

riskmanagementandclose

relationshipswithclients

TraDiTioa

ba

wiig ba

braC a a

ba


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77

The financial and economic crisis has

brought to the fore small business

bankings ke challenge:

How can banks master the cost of risk

and also accelerate development?

Introduction

FAC TE SMA BUSESS MARET

S A Ey FACTR TE wRDS

EMyMET AD ECMy

Small businesses play a major role in the worldeconomy. In Europe, Japan, and the USA, 99% ofthe enterprises belong to the small business marketand are responsible for 51% of the employment in theprivate and non-financial economy (see Methodologyfor how we define the small business market). Smallbusiness employment is more than 50% in the EU27and approximately 40% in the USA (see Figure 1).

Figure 1 Contribution, b size categor, in terms

of number of enterprises, emploees,

and value added

Value added at

factor cost

Number of

persons employed

Number of

enterprises

7%

1%

92%

30%

21%

19%

18%

42%

17%

32%

21%

I Large-sized enterprises I Medium-sized enterprises

I Small-sized enterprises I Micro-sized enterprises

99%

51%

40%

Small Business

Source: EIM/European Commission,Annual Report on EU Small andMedium Enterprises (first section), January 2009.

This is a high-growth market. In Europe between2002 and 2007, the number of small and mediumenterprises grew by 11%, and their number ofemployees went up by 9% (versus 4% and 3% for thelarger enterprises). The line-of-business diversificationof small businesses helps mitigate the impacts ofmacroeconomic downturns at the national or globallevel. That is why, when added to the fact that smallbusinesses employ such a large portion of a nationspeople, governments often rely on small businesses toboost economic recovery in times of crisis.

TE SMA BUSESS MARET S A ERy

ATTRACTE AD STRATEC MARET

FR RETA BAS

According to our interviews, while representing lessthan 10% of the retail banking client portfolio, thesmall business market accounts for almost a third ofretail banks net banking income (NBI) (see Figure 2).

Figure 2 weight of the small business market

in retail banking

10%

27%

46%Proportion of small

business risk-weighted

assets in retail banking

Proportion of small

business net banking

income in retail banking

Proportion of small

business clients in

retail banking

Source: Capgemini analysis from bank interviews, 2010.


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Small businesses rely mainly on banks for theirfinancing needs, because they have very limited accessto equity. Credit and loans, therefore, are at the heartof small businesses relationships with their banks,

and represent 40% of the total retail banking NBI inthis market (see Figure 3).

Small business clients also represent a highdevelopment potential for banks. One of the primarychallenges is to become the clients main banker andcapture as much of the flows, credit, and savings aspossible through cross-selling and up-selling. Butpart of the challenge also lies on the private side, asbankers try to cross-sell products to the entrepreneurand secure client loyalty.

TE SMA BUSESS MARET S A ARD UTT CRAC BECAUSE T S RSy AD CMEx

The small business market is risky. Small businessesare more vulnerable than larger enterprises (lowcapitalisation and no credit ratings, for instance) andhave high bankruptcy rates. As Figure 2 showed,although small business represents 27% of retail NBI,it accounts for 46% of total retail risk-weighted assets.

Yet small business is a complex market to deal with.Spread across retailers, artisans, farmers, associations,liberal professions, and small enterprises, it featuresbehaviours and needs from both the mass andcorporate markets. To handle this market, successfulbankers will develop a mixed approach betweenstandardisation and customisation in their offers.

TE ECMC AD FACA CRSS

TED RETA BAS CAEE

F MAA RS wE ACCEERAT

DEEMET

The global f inancial and economic crisis stronglyaffected small businesses. They endured severe cuts inturnover and profit, and an increase in the number ofdefaults, insolvencies, and bankruptcies. Considering

the high importance of small businesses in nationaleconomies, most governments and other publicsectors have implemented measures to help themface the crisis, including supporting sales, cash f low,and working capital; enhancing access to finance;supporting investment; strengthening capital; andthe like.

With small business clients going through hard times,bankers face two difficult threats: (1) a rise in the cost ofrisk; and (2) a drop in demand. According to the bankswe surveyed, cost of risk is the first threat caused bythe crisis (51% of respondents), followed by the drop indemand (31%), well ahead of pressure on prices (10%)and better-armed competitors (8%) (see Figure 4).

Figure 3 Small business net banking income

product structure

40%

29%

5%

26%

I Loans and credit I Deposits and savingsI Operations and transactions I Other


The tremendous increase in the cost of risk hasforced banks to strengthen their risk management.In particular, one of the challenges banks now faceis to continue assessing correctly the new creditapplications for underwriting. The traditional way ofassessing creditworthiness is questioned in times ofcrisis, because the analysis of most borrowers financialstatements or liquidity behaviours has deteriorated.Faced with this reality, banks have to define a cost-

effective way to develop predictive or business planninganalyses adapted specifically to the small businessmarket.

The drop in demand is mainly for credit, resultingfrom investment freezes and, to a lesser extent, fromthe use of such alternative financing as associativenetworks and public funds.

The global financial crisis has led to higher costsof financing. As a result, for the first t ime since2005, European bankers expected a decline in their

revenues from the small business market in 2009 (seeFigure 5).

As a first reaction to the financial crisis, manybanks were forced to slow down their credit activityin response to a peak in the cost of risk. This wasonly temporary, however, as the double pressure ofgovernments commands and banks own growthneeds made development a top priority.

Banks have always faced the challenge ofmanaging risk while accelerating development.In this time of crisis, however, the chal lenge hasdramatically increased.


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9

Figure 4 Main threats caused b the crisis, according to bankers (% of banks intervieed)

Better-armed competitors

Pressure on prices

Decreasing demand

Increasing cost of risk 51% 35% 86%

31% 37% 68%

10% 35% 45%

8% 26% 34%

I Most important threat I Quite important threat


Figure 5 Five-ear revenue groth for European small business banking

-10%

-5%

0%

5%

10%

15%

20%

20082009e200720082006200720052006

Western Europe Central and Eastern Europe

11%

18%

14%

18%

4%

10%

-7%

-8%

Source: Efma/Finalta study, Direct Channels for Small Business Banking, January 2010.

INTRODUCTION


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1111

The winning Bank Model

in the Small Business Market

Chapter 1

To ensure the eff iciency of these first twocharacteristics, banks also need to implement aneffective and complete credit risk managementsystem that meets the highly specific and complex

risk management needs of the small businessmarket. This system relies on fully integratedprocesses and an eff icient supportinginformation system.

This first chapter of the report will describe thesethree characteristics. Chapter 2 will highlight thebenefits of the winning bank model. In Chapter 3,we will specify the possible paths to reach andimplement this winning model.

Based on our own experience and on the bankinterviews we conducted for this report, we areconvinced that to perform well in risk managementand develop the small business market, and eventually

become what we call here a winning bank,successful retail banks will improve the role of theirrelationship managers (RMs) and beef up their creditrisk management systems (see Figure 6).

This winning bank model has three primarycharacteristics:

RMs with client relationships based on a deepunderstanding of each clients line of business,needs, and expectations, as well as substantialrelationship strength.

RMs empowered to act on risk management issues,

in terms of both underwriting and active creditportfolio management, fully aligned with riskmanagement department policies and supported byappropriate systems and organisation.

Figure 6 Four models for retail banks operating in the small business market

Source: Capgemini analysis, 2010.

Top-Dow,iTegraTeD ba

Completeandfullyintegrated





Cdt sk

mnmnt systm

rltnsh mn l

Lowlevelofempowermenton






TraDiTioa

ba

wiig ba

braC a a

ba


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As shown in Figure 7, we identified four RMrelational models that trade off differently betweenthe three critical factors in solid relationshipmanagement: portfolio size, expertise level, and close

relationships. Two of themB and Dfavour closeclient relationships.

Model B enables the RM to build strong clientrelationships, because the RM is fully availableand deeply aware of each clients business needs.These RMs are experts on most of the products andservices small businesses need. Their client portfolios,however, must be limited.

In model D, RMs also develop very close relationshipswith their clients while managing a larger number ofclients than in model B. As a consequence, however,

they are in a position to sell a smaller number ofproducts and services unless they get help fromproduct experts offering technical sales support.

These two models are used most by banks in thesmall business market, especially for small-sizedclients who require more RM time to build closeclient relationships. For these clients, 66% of surveyedbanks are already operating one of these two modelsor will implement one of them in the near future(versus 38% for micro-sized clients) (see Figure 8).

RMs EED T DEE CSE CET

REATSS

By close client relationships we mean proximity,availability, and stability of the relationship,

along with genuine concern for the success of thecustomers business. Moreover, deep knowledgeand understanding of each clients line of business,needs, and expectationsand of the entrepreneurshipissues behind themare key success factors in thesmall business market (unlike corporate banking,where knowledge of the clients industry is muchmore relevant).

Among all distribution channels, RMs areand willremainthe linchpin of client relationships. For thesurveyed banks, 93% of their small-sized clients will

be assigned to an RM portfolio in the near future,versus 89% today. Several banks that have developedcall centres too far, disrupting the relationship betweenclients and RMs, are now coming back to a moreRM-centric, multi-channel scheme, giving priorityto face-to-face interactions. (For micro-sized clients,howevergiven their simpler needsRMs can alsointeract by telephone or through other direct channels.)

This is one good reason why banks have to reviewand strengthen the role and profile of their RMs. Toenable such RM positioning, lengthening the RMs jobduration is a key success factor. Ideally, RMs should stay

four or five years in their job. Today, based on what weobserved in the market, RMs average three years.

Banks need to give their RMs the time they need tobuild very strong relationships. As a consequence,banks can limit the number of clients an RMmanages, or limit their assignment in terms ofexpertise with products and services so that RMs donot have to sell all products and services in the smallbusiness range.


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13THEWINNINGBANKMODELINTHESMALLBUSINESSMARKET

Figure 7 Four relationship manager models, ith to models favouring close client relationships


PORTFOLIOSIzE

ExPERTISE

LEEL

CLOSE

RELATIONSHIPS

RMsmanageamediumnumberofclientswithwhomthey

arefairlyclose.Theyhaveanaverageepertiseonthe

majorityofproductsandservices.

RMsmanagealargenumberofclientsanddonothavetime

tobuildcloserelationshipswiththem.Theyhaveamore

limitedlevelofepertiseonproductsandservices.

Figure 8 ercentage of surveed banks using model A, B, C, or D

Micro-sized clients

Small-sized clients I Model A

I Model C

I Model B

I Model DMicro-sized clients

Small-sized clients 25% 9% 46% 20%

22% 40% 16% 22%


Mdl a

Mdl C

PORTFOLIOSIzE

ExPERTISE

LEEL

CLOSE

RELATIONSHIPS

PORTFOLIOSIzE

ExPERTISE

LEEL

CLOSE

RELATIONSHIPS

PORTFOLIOSIzE

ExPERTISE

LEEL

CLOSE

RELATIONSHIPS

RMsbuildstrongandcloserelationshipswithclientsandarefully

availableandawareoftheclientsneeds.Theymanageamorelimited

numberofclientsandareepertsinmostproductsandservices.

RMsbuildcloseandstrongrelationshipswithclientsandmanage

alargenumberofclients.Asaconsequence,theycansellonly

afewproductsandserviceswithoutepertsupport.

Mdl b

Mdl D


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Accordingly, most banks interviewed intend to reducethe size of their RMs client portfolio, as shown inFigure 9, which is consistent with model B.

Especially for banks implementing model D, technicalsales support resources (such as product experts) can beset up for the most complex and sophisticated productsand services, such as electronic payments, tradefinance, internationalisation, and private banking.These product experts are used more and more byretail banks, and of banks we surveyed, 55% said theywere already using them today, and 12% said theywould set them up in the near future.

Beyond the implementation of these two modelswith the reduction of client portfolio size or thecreation of technical sales expertsbanks need to

enhance supporting measures designed to free uptime for RMs, such as:

Reinforcing and professionalising middle-officepositions (such as sales assistants) to supportRMs, primari ly by lightening RMs workload onadministrative and non-commercial tasks.

Simplifying the range of products and servicesthey offer to small business clients, along withsimplifying the process that helps RMs accessand choose the right products. Of the banks we

surveyed, 40% intend to simplify their productrange, while 20% intend to make it moresophisticated (40% will leave the situation as is).As an illustration of a reduced product range, a large

European bank that formerly proposed 250 productsfor savings and deposits is working to reduce it to15 key products.

Continuing to improve sales and after-salesprocess efficiency.

Banks wil l continue to encourage RMs to intensifytheir relationships with clients, and adopt closermanagement of the client portfolio, by increasing thenumber of client meetings (taking care to improvemeeting quality to avoid being perceived as intrusive),and by integrating this dimension into their objectives

system.

Finally, banks can help their RMs develop theirskills and understanding of client needs by regularlyupdating and enriching an intranet dedicated to thesmall business market. The aim will be to capitaliseon the knowledge that banks are continuouslydeveloping about such important topics as markets,business lines and professions, products, creditpolicies, processes and tools, and the like.

Figure 9 Client portfolio size per relationship manager (average number of clients)

Micro-sized clientsSmall-sized clients

305

160

371

233

I Current

I Expected



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15

RMs EED A EE F EMwERMET

RS MAAEMET

Two opposite risk-empowerment profiles can be de-fined: RM as a sales managerand RM as a small banker.

High-performing banks will select the second profile.

The first profile, RM as a sales manager, emphasisesthe four-eye principle: most of the credit decisions,especially underwriting or loan rescheduling, must bedouble-checked by a risk analyst, or at least a regionalor national sales manager. The level of empowermentRMs have in this commonly found scenario is ratherlimited, and these RMs are focused on sales andcustomer service.

The second profile, and the one that leads tothe winning bank model, is the RM as a small

banker. It gives RMs substantial responsibility andempowerment on risk management, as well as forcredit underwriting, behavioural monitoring,1 and loanrescheduling. In this scenario, the RM is regardedas the person playing the key role to make the rightdecision on credit underwriting or even rescheduling,because he or she is responsible for the day-to-dayclient relationship and has the best knowledge ofthe clients needs and economic situation. In timesof crisis, this point is all the more important becauseit becomes crucial to predict whether a clientsdifficulties are temporary or structural.

Depending on the profile adopted, successful bankswill implement appropriate measures, tools, andprocesses aimed at ensuring performance, controllingthe resulting risk, and supporting RMs.

In the profile RM as a sales manager, above all, abank needs to invest in process efficiency, especiallyaimed at avoiding time-to-decision delays, sincemore people are involved in the decision at differentlevels and places in the company. Moreover, in thisprofile, eff icient client data management (creditrelationship management tools, data knowledge

management processes, and so on) is necessary toensure the availability of accurate information, bothqualitative and quantitative, at any time and at any

level of the bank (local, regional, national; sales andrisk organisations). Strong RM training on decisionprocesses (credit scoring interpretation, decisionscheme, level of authorisation, scaling process) and

data management processes are also mandatory for thisprofile.

In the profile RM as a small banker, banks need to: (1)strengthen the RMs risk management skills; (2) freeup time for RMs, continuously improve the creditprocess, and provide dedicated coaching resourcesto help them manage sales and credit decisions; (3)establish measures aimed at controlling the resultingrisk of such a profile; and (4) create durable clientrelationships.

First, to ensure relevant and accurate decisions,

excellent RM training on risk management is requiredin this profile, including credit scoring interpretation,risk assessment, behavioural monitoring, and loanrescheduling.

Second and above all, because it is difficult for RMs todeal with sales and credit risk issues at the same time,a bank will have to free up RM time by reinforcingsupport from middle-office resources, which willrelieve the RM of administrative credit tasks, andalso improve credit process efficiency. (Banks mightalso extend an automated decision process to a wider

micro-loan scope.) In addition, RMs will need to besupported and coached by dedicated resources on allthese issues (we develop this good practice further inthe next chapter).

Third, appropriate reporting, or more thoroughmanagement by objectives (MBO) systems, arealso necessary to highlight the cost-of-risk factorat the RM level. These systems allow banks toassess RMs risk management performance sothey can appropriately structure the RMs level ofempowerment, their incentives, their training, andeven their career evolution. Such measures act as a

barrier against potentially bad assessments or, evenmore critical, connivance with clients.

THEWINNINGBANKMODELINTHESMALLBUSINESSMARKET

1 Behavioural monitoring entails the RM reviewing (usually monthly) his or her credit portfolio, client by client, to catch early-warning signals of deterioration

and decide what actions are needed for that particular client.


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Figure 10 Appropriate measures for the to risk-empoerment relationship manager profiles


pcss fcncy iT sut n tls Cchn, mnmnt

y jctvs

rM tnn rM stlty n th j

rM s

sls

mn

Underwriting

and rescheduling

decision process,

client data management

process, etc

CRM tools, scoring

tools, early-warning

indicators, etc

MBO focusing mainly on

client contacts and sales

Decision process,

scoring interpretation,

understanding risk

by line of business or

market, etc

Durable client

relationships with low

RM turnover, etc

rM s

smll

nk

Underwriting

and rescheduling

decision process,

client data management

process, etc

CRM tools, scoring

tools, early-warning

indicators, etc

Reporting of cost of risk at

RM level, with integration

of this dimension in MBO

Scoring interpretation,

understanding risk by line

of business or market,

behavioural monitoring

and rescheduling, etc

Durable client

relationships with low

RM turnover, etc

Strongneed Significantneed

Developing scenario analyses for the main riskparameters, to accurately plan, budget, and forecastloan-loss provisions, new non-performing loans,and expected losses.

Developing specif ic risk strategies and policiesin terms of risk appetite for each type of client,product, risk class, industry, geography, anddistribution channel.

Monitoring the credit portfolio, producing a set ofreports (tableau de board), analyses, studies, surveys,simulations, and detailed forecasts, to measurecredit risk, identify any anomalies or built-inproblems to be communicated to the appropriatelevels of management, and propose correctiveactions aimed at constantly improving overall creditquality.2

Arranging a constructive and regular dialoguebetween the sales and risk organisations.

Second, the credit risk management system relieson several key macro-processes in risk operations(underwriting, behavioural monitoring, and creditcollection) and in risk management (such as riskstrategies, portfolio monitoring, credit policies,credit models, credit data management, regulatoryand compliance, audit and control). They mustbe constantly improved by the risk managementdepartment. (In Chapter 2, we will develop the threemain best practices at stake following the crisis: widerusage and sophistication of rating-based scoring tools,strengthened proactive management of performingcredit portfolios, and an improved credit collectionprocess with soft collection.)

Finally, reduced sales force turnover to maintaindurable client relationships is also a key success factor.It will strengthen RMs client knowledge for relevantcredit decisions, and ensure accurate cost-of-risk

reporting at the portfolio level. The RM as a smallbankerprofile might help a bank lengthen the RM jobduration, as well, because it gives every RM the powerto better help their clients in their businesses, makingthe RM job more attractive.

Figure 10 summarises the key measures that ensureeach model will be effective and support the RM, andSidebar 1 is a short case study of a large Europeanbank using the RM as a small bankerprofile.

T BAS w AE A EFFCET AD

CMETE CREDT RS MAAEMET

SySTEM

The winning bank model also relies on a bank sability to implement a complete risk managementsystem closely fitting the highly specific and complexneeds of managing small business credit risk. By riskmanagement system, we mean three major elements:(1) governance; (2) macro-processes; and (3) asupporting information system.

First, it is crucial to set up a clear and efficientgovernance scheme aimed at ensuring the rightdecisions are made on policies, processes, and tools

by involving the appropriate level of management,depending on the financial stakes. Eff icientgovernance relies on several key success factors:

Setting up an appropriate committee scheme,differentiating committees focusing on operationsfrom committees dealing with credit policy issues.

2 Portfolio monitoring is performed centrally by risk management analysts.


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17

Illustration of a large European bank operating with the

RM as a small bankerprofile for risk management

T ESURE RS MAAEMET ERFRMACE

AD CTR, TE BA AS SET U SUC

MEASURES AS:

Maintainingstringentreportingofcostofrisk

attheRMportfoliolevel,integratedintheMBO

system,topersonalisetheRMsincentiveand

levelofauthorisationforunderwritingand

rescheduling.Recurrentorhighcostofriskmay

affecttheRMscareerevolution.

Givingprioritytosalesforceskillsandclient

knowledgeinunderwriting(scoringsystem

improvementandprocessefficiencyarenot

priorities).

Foreistingportfoliomanagement,

trackingearly-warningindicators(EWIs),such

asincreasingpast-duepayments,decreasing

transactionsoroperations,increasingutilisation

ofcreditlines,etc.

InducingRMstostayonthejobatleastfive

years;currentaveragedurationisfouryears,

therangebeingthreetoeight.

Thiscooperativebankisoneoftheleadersinthesmallbusinessmarket,witha24%penetrationrate.

Thebankdelegatesriskmanagementdecisionstotherelationshipmanagers,bothforunderwriting

andforrescheduling,toensurefastandaccuratedecisions.

Ew A UDERwRT:

Mostofthedecisions(85%)aremadeatthe

locallevelbyRMs(orbranchmanagers).

Theotherdecisions(15%)arecommonly

madeattheregionallevelbysalesandrisk

departments.

Thebankdoesnotusescoringtools,andthe

onlydecisionsthataremadeautomatically(15%

ofthenewloans)correspondtopre-approved

loans(RMsmaycontactsomeclientstooffera

pre-definedcreditline).

ExST A MAAEMET AD RESCEDU:

RMsarefullyinvolvedintheirloanportfolio

monitoring.Theyaredirectlyresponsiblefor

managing(includingrestructuring)the15%ofthe

riskiestperformingloans.

Collectionismanagedbyaregional(or

interregional)dedicatedentityattachedtothe

riskdepartment.

Sidebar 1



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Third, banks have to implement a complete andfully integrated credit risk management informationsystem, attuned with business needs through theentire credit risk management value chain, as shown

in Figure 11.

This system will leverage existing tools of othermarkets as well as applications specifically developedfor the small business market. It will enable fullintegrationalong all stages of the credit sales andrisk-management value chain (from underwriting tobehavioural monitoring and credit collection)ofall processes linked to client management, internaldecision-making, prudential reporting feeds, andaudit trail constraints.

Such a system will help banks cope with the primarycredit data management challenges they are facingin the small business market today (see challengesin Figure 12). It will ensure that several majorconsiderations are covered:

Relevancy and deepness of data gathered frominternal and external sources (e.g. diversified datafor scorecards: financial data, predictive data,qualitative information, and so on).

Quality of data regularly validated and updated.

Integration of data to avoid redundancy or thenecessity to capture repeatedly the same data atdifferent stages (e.g. the underwriting decisionprocess, credit origination process, and regulatorycompliance/Basel II process).

Knowledge management over time to enable trendand historic analyses (e.g. follow-up of a loan fromorigination to servicing and recoveryespeciallyefficient collection).

Wide and appropriate diffusion to guarantee fulldata accessibility by credit information systems andspecialists. This system also takes advantage of aservice-oriented architecture (SOA) to perform the

seamless integration of datamarts and applicationsspecific to the small business market, as well asthose shared with other markets. It provides finalusers (such as sales forces, sales managers, riskanalysts, and risk managers) with a comprehensiveportal on their workstations that al lows access to allrelevant tools and information with a user-friendlyWeb 2.0 interface.

Finally, by using collaborative tools, such as instantmessaging, forums, wikis, and peer-to-peer solutions,banks wil l be able to spread across the community

of their small business specialists the best practicesdeveloped in their network.

By combining RM closeness to customers, high RMempowerment on risk management, and an efficientand complete credit sales and risk-managementsystem, successful banks will be able to master riskwhile maintaining high business development andoutperform their competitors in the small businessmarket. In the next chapter, we will develop thebenefits that implementing the winning bank modelcan achieve.


19/40

19

Figure 11 Complete and full integrated credit risk management information sstem for the small

business market

CREDIT RISK OPERATIONS AND RISK MANAGEMENT KEY MACRO-PROCESSES

User-friendly workstations

customised for each actor involved

in small business marketing,

commercial, and risk departments

Credit Policies andCredit Risk Strategies

(Dashboards and reporting,profitability analyses, etc)

Behavioural andPortfolio Monitoring

(Performance reporting,EWIs, loan restructure

history, etc)

Regulatory andCompliance

(Internal rating,relevant PD and LGD

reporting, etc)

Audit andControl

Underwritingand Pricing

(Scorecards, RAROC [risk-adjustedreturn on capital] pricing, sales

reporting, process efficiency, etc)

CreditCollection

(Performance reporting,loan life history, loan

restructure reporting, etc)

Clients and other

counterparts' general

information, including

links to private data

Risk-oriented

internal and

external information

about borrower

Marketing information

and recommended

offerings based on

business lines

Risk information

about economic

sectors

Small business

specialists sharing a

data warehouse and

knowledge database

Seamlessintegrationbasedon

service-orientedarchitecture(SOA)

Clientrelationship

management(CRM)

Needsanalysis, product

catalogue andconfiguration tool

Portfoliomonitoring andearly-warning

indicators

Prudentialreporting feed

Requesting andcollaborative

tools

Salesreporting

Risk scoringand risk-adjusted

pricing tools

All relevantsystems anddatabases:

Specific tosmall businessmarket

Shared withretail, private,or corporate

market

Sales force

(RMs, creditexperts, etc)

Salesmanagers

Risk analysts,collectionstaff, etc

Riskmanagers

Service Integration

Master Data Management

Business process

workow managementand audit trail


Figure 12 Credit data management challenges (% of banks intervieed)

Isolated and redundant databases

Issues with data

accessibility and availability

Manual data gathering

Limited capability to compile

trends and history

Lack of integration (workow fromorigination and servicing to

close or recovery)

Issues with data quality 39%26% 65%

28%25% 53%

15%34% 49%

17%30% 47%

11%35% 46%

15%20% 35%

I Most important challenge

I Quite important challenge




20/40



21/40

2121

e Benefits of the winning Bank Model

Chapter 2

Figure 13 e small business client epectations, and impact of the crisis, according to bankers

(% of banks intervieed)

Customised multi-channel relationship

Pricing and billing

readability and simplicity

Customisation of

products and services

Pricing competitiveness

(credit, operations and ow, etc)

Service quality

Reputation and brand image

Easy access to credit (fast decisions,

clear granting conditions)

Understanding of customers line of

business and entrepreneurship issues

Close relationship

(proximity, availability, stability) 29%

36%

10%

16%

6%

9%

16%

3%

3% 5%

8%

5% 21%

11%

8%

13% 22%

3% 23% 32%

19% 8% 43%

19% 18% 47%

6% 10% 52%

19% 10% 58%

I 1st expectation I 2nd expectation I 3rd expectationIncreasing importance due to the crisis Decreasing importance due to the crisis


We identified three major benefits of the winningbank model:

1. It contributes to higher small business clientsatisfaction, especially since the crisis.

2. It better leverages a cross-sell ing strategy, which isat the heart of retail banks development efforts inthe small business market.

3. It enhances a banks ability to develop and use riskmanagement best practices.

TE w BA MDE BETTER

SATSFES SMA BUSESS CETS,

ESECAy SCE TE CRSS

The global financial crisis has pushed closeness withcustomers (proximity, availability, stability of the

relationship), along with an understanding of each

clients line of business and entrepreneurship issues, tothe top of the small business clients expectations list.

As shown in Figure 13, 58% and 52% of our surveyed

banks put these expectations high on their list ofmost important expectations. Easy access to creditand brand image and reputation are also importantexpectations for small business cl ients.

A highly empowered RM profile, furthermore, willhelp satisfy clients, who usually prefer to deal directlywith a decision-maker rather than a messenger andappreciate receiving a quick answer concerning theircredit requests. Our winning bank model meets allof these expectations.


22/40


billing policies through such innovations as f ixed-price contracts, to satisfy clients expectations formore simplicity, clarity, and transparency.

Another key success factor to help banks developbusiness and make the most of cross-selling is the useof relevant commercial/relational segmentation aimedat designing the best commercial organisation toserve various client categories (such as RM generalistsor specialists, professional or private relationships,or a multi-channel model). Almost 80% of thebanks we interviewed said they use commercial/relational segmentation. To do so effectively requiresavailability and relevancy of client data. Generallyspeaking, we found 40% of surveyed banks followeda segmentation sophistication trend (versus 20% of

banks intending to simplify their segmentation and40% expecting to keep it unchanged).

As illustrated in Sidebar 2, banks are using differenttypes of commercial/relational segmentation, built ondiverse criteria.

TE w BA MDE EABES A BA

T EERAE TS CRSS-SE STRATEy

Because it can make the most of a deep understandingof client needs, the winning bank model fully supports

customer-centric development strategies currentlyfavoured by retail banks, aiming at becoming theclients principal bank in a win-win relationship. Ofthe banks we interviewed, 73% viewed cross-sellingor up-selling as a priority, both on professional andprivate offers, as shown in Figure 14.

RMs are clearly at the forefront of cross-sellingstrategies. Among all marketing levers for cross-selling, sales action is the first to succeed in thisstrategy, well ahead of product improvement orpricing innovation, as shown in Figure 15.

As an illustration of good practice in sales action forcredit, defining pre-approved credit lines for someclients can create demand. To develop sales in currentaccount operations and transactions, many banksare proposing unbundled offers, or simplifying their

Figure 14 Development strategies favoured b banks (% of banks intervieed)


* Percentage of banks that selected this strategy as a priority.

** 73% of banks surveyed have selected at least one of the three cross-selling or up-selling strategies.

Eistingclients Newclients

Newproducts

andservices

Eistingproducts

andservices

PRODUCTINNOATION

CONUEST

20%*

48%*

73%**

CROSS-SELLINGON

PROFESSIONALOFFERS

68%*

CROSS-SELLINGON

PRIATEOFFERS

36%*

UP-SELLING

45%*

Figure 15 Cross-selling marketing levers b categor of product (% of banks intervieed)


l s c tn p du ct m v m nt blln cn nnvtn p c duc tn

Short-termfinancing(workingcapital,factoring,etc) 75% 48% 20% 8%

Currentaccountoperationsandtransactions 78% 43% 23% 3%

Long-termfinancingandinvestmentloans 80% 70% 15% 10%Insuranceproducts 67% 61% 17% 0%

Depositsandsavings 68% 38% 16% 10%

Morethan75%ofrespondents 5075%ofrespondents 2549%ofrespondents Lessthan25%ofrespondents


23/40

23KEYBENEFITSOFTHEWINNINGBANKMODEL

Illustrations of commercial/relational segmentationSidebar 2

Objective: Commercial/relationalsegmentationaimsatdefiningclientclusterswithhomogeneousneedsand

epectations,allowingbankstodesignforeach:

Anoptimalcommercialorganisation(RMsroleandclientportfoliosie)

Anappropriaterelationalmodelandpolicies(e.g.developmentobjectives,andfrequencyofcontact,typesofcontact,andchannelsofcontact)

Criteria:Segmentationcriteriadiffergreatlyfrombanktobank,andmayinclude:

USTRAT 1: SEMETAT AMED AT DEF DFFERETATED REATA AD CMMERCA CES

Supportclientinvestments,reviewwhenpossible

pricingforselectedproducts,increasecross-selling

Supportclientinvestments,createbarrierspreventing

transferofbusinesstocompetitors,cross-sellvalue-

addedproductsandservices

Evaluateeconomicoutlook,requiremorecollateral,

reduceeposure,reviewcreditpricing

Imposestrictercreditconditionsandrequiremore

collateral,stopproactivecommercialactions

assctd Cmmcl plcy ml actnsmnttn

Reduceeposureoreiteryhighcreditrisk

orriskofpaymentdefault

RaiseprofitabilityLowbankingincome

andcashonlyorlowcreditrisk

ProtectcreditriskHighcreditrisk

MaintainloyaltyHighbankingincome

andcashonlyorlowcreditrisk

Lowannualturnoverandhightotalcreditoutstandingwithallbanks

Lowtotalcreditoutstandingwithallbanks

Highannualturnoverandhightotalcreditoutstandingwithallbanks

Remotemanagement:relationshipalmostentirelymanagedbyphoneande-mail

TwodifferentRMshandleclientsbusinessandpersonalbanking

Remotemanagement:relationshipalmostentirelymanagedbyphoneande-mail

OneRMhandlesclientsbusinessandpersonalbanking

Face-to-facemanagement

OneRMhandlesclientsbusinessandpersonalbanking

USTRAT 2: SEMETAT AMED AT DEF DFFERETATED REATA/BUSESS MDES

assctd rltnl/busnss Mdlmnttn

Othermicro-siedenterprises

Farmers

Small-siedenterprises RMspecialist*

Liberalprofessionals

RMspecialist*

RMgeneralistor

branchmanager(BM)

RMspecialist*

RMspecialist*

mnttn

USTRAT 3: SEMETAT BASED CETS E F BUSESS AD AMED AT RAS SAES FRCES

assctd Cmmcl onstn

*Forbranchesorbusinesscentreswithlargeclientportfolios.

or

or

or

Source: Capgemini analysis, 2010; bank interviews by Capgemini, 2009; bank presentation at Efma SME Business Banking Conference (Amsterdam, October 2009).

Clientslineofbusiness(e.g.farmer,retailer,liberalprofessional,smallenterprise,association)andmarket

segment(e.g.health,building,financial,food,trade)

Clientsannualturnover

Clientslevelofrisk(e.g.creditrating)

Enterpriselifecycle(creation,development,transmission)

Natureoftherelationship(businessorpersonalbanking)

Clientsannualbankingincomeorprofitability(currentandpotential)

Seniorityoftherelationship

Compleityofthebusinesscycle


24/40


As shown in Figure 17, banks use three primarytypes of information about the borrower and the loan:(A) external f inancial information (mainly basedon financial statements, rating when available, and,

more rarely, business planning to integrate predictiveanalysis); (B) external qualitative information aboutthe borrower (such as experience, competitiveposition, and the like); and (C) internal informationabout the borrowers relationship and behaviourwith the bank (liquidity analysis, revenues andprofitability, proportion of past-due payments orNPL history, utilisation of credit lines, and so on).This last criterion (C) is considered a good indicatorby which to assess a clients situation, and 62% of thebanks we surveyed see it as the most important sourcefor scoring.

With the crisis, however, the backward-lookinganalysis of f inancial statements and the observationof clients behaviour and liquidity profile are lessrelevant. In times of crisis, most small businessclients financial statements and liquidity ratiosdeteriorate. The problem for banks today is to decidewhether or not these difficulties are only temporary.This is why banks will succeed only if they integratemore predictive considerations into their decisionprocess, such as business planning approaches.

However, it is quite difficult, costly, and time-consuming to extend the use of business planning toa lot of clients. This is why it is important to rely onRMs cl ient knowledge and proximity to select clientsrequiring a thorough business planning assessment.Beyond that, banks should think about developinginnovative tools, processes, and RM training to use inbusiness planning approaches in a cost-effective way.

Enhanced proactive management of performingcredit portfoliosBy proactive management, we mean quicklyidentifying loans showing the first signs ofdeterioration. Only in this way can a bank agreewith a client on a solution and prevent these loansfrom becoming non-performing. Today, proactivemanagement of a credit portfolio is becoming evenmore crucial, because the crisis has produced a largeincrease in both the cost of risk and the number ofnon-performing loans in the small business market.

TE w BA MDE EACES A

BAS ABTy T DEE AD USE BEST

RACTCES RS MAAEMET

We identified the following best practices to perform

on risk management in the small business market: Wider usage and sophistication of rating-basedcredit scorecards to support underwriting andmonitoring decisions.

Enhanced proactive management of the performingcredit portfolios.

Improved collection policy, with development ofsoft collection (or amicable collection).

Thanks to its strengthened RM role, the winningbank model raises the quality of gathered data(producing more relevant credit scores and reporting)and improves the quality of solutions and negotiationswith clients for proactive credit management andcollection.

The effective credit risk management system of thismodel makes the most of credit scorecards accuracyand relevance, improves the quality of early-warningindicators, and enables integrated loan follow-up forefficient collection, throughout the loans life. Themodel also helps banks develop a set of analyses andreporting that supports credit policy governance.

Wider usage and sophistication of rating-basedscorecards to support the underwriting decisionHaving relevant scorecards is a key competitiveadvantage for underwriting, especially when it comesto mass-market credit. In the small business market,assembling sufficient statistics is all the more difficultbecause it is a fragmented market. This obviouslyprovides a big advantage to leading banks.

Since the beginning of the crisis, most banks haveincreased their use of scoring tools; 69% of the bankswe surveyed told us that underwriting decisions are

now or soon will be supported by new scoring tools,versus 63% before the crisis (see Figure 16).

To increase the relevance of scoring tools, thebest retail banks will continue to search for moreaccurate and diversified data. Almost half of thebanks we surveyed believe that scoring improvementis among the most important factors to ensureunderwriting effectiveness, and 53% of surveyedbanks plan to strengthen the data underlying theirclients credit scores.


25/40

25

Figure 16 Use of scoring tools in underriting decision-making (average % of loans of banks intervieed)

Current or expectedBefore the crisis

51%

37%

12%

31%

13%

56%

I Decision fully automated

I Decision supported by rating and/or other scoring tools

I Decision made manually (experts judgment)

63%69%


Figure 17 Most important criteria (among three tpes) used b surveed banks to establish their borroers

credit scores (% of banks intervieed)

B. External qualitative information

A. External nancial information

C. Internal information (about borrowers

relationship and behaviour with bank)62%

53%

30%


KEYBENEFITSOFTHEWINNINGBANKMODEL

Eternalinformationabouttheborrowerandtheloan Internalandbehaviouralinformationabouttheborrower

Financial information

Annualfinancialstatements

(P&L,balancesheet,etc)

Businessplan

Creditbureaunotations

Qualitative information

Lineofbusiness

Businesseperience,

particularlyonsimilarprojects

Competitiveposition

NBIandprofitability

Pastandcurrentbehaviouronlending(e.g.

paymentdefaults,past-duepayments,NPL)and

currentaccount(e.g.increaseduseofcreditlines)

a. b. C.


26/40


the existing portfolio and coach the RMs. Evenfurther, 46% of interviewed banks are relying onproactive management indicators in the MBO andincentive systems to improve RM effectiveness.

Improved collection policy with soft collection(or amicable collection)Despite banks efforts to deal with deteriorating loansas early as possible through proactive managementof a performing portfolio, the crisis has pushedmore and more small business clients, even the mostvaluable of them, towards insolvency difficulties.

Traditional collection policies, usually focused onsimply recovering money, have their limits and couldbreak the client relationship. Soft collection is a

consistent answer to one of the key success factors forsmall business bankingto care about the customersbusiness successand also an answer to governmentspressure on banks to support the economy.

As a result, many banks have implemented softcollection processes, which aim at returning clientrelationships to normal without losing money whilemaintaining a trustful relationship. Since the crisisbegan, 43% of banks surveyed have softened theirexisting collection policies (see Figure 21).

Generally speaking, a soft collection process can beapplied to all clients as an intermediate stage betweenproactive management and collection. Yet 13% ofbanks surveyed use soft collection only for their mostvaluable clients.

We believe al l banks should proactively manage theirportfolios, but 11% of the banks we surveyed still donot, as shown in Figure 18. We think banks shouldeven extend the scope of proactively managed loans.

On average, the banks we surveyed are planning toproactively manage 43% of their total performingcredit portfolios in the near future.

Efficient proactive management relies on havingmore accurate early-warning indicators that help thebank quickly identify borrowers facing difficulties(note the nature of EWIs used by banks in Figure19). Because of the crisis, 55% of surveyed banks planto improve their EWIs.

The main challenge for banks is to identify whether

the difficulties facing their clients are structuraland long-term, or temporary. RMs are in the bestposition to assess their clients difficulties. Top bankswill involve their RMs to manage their portfoliosproactively through situation analysis, solutiondesign, and negotiation with the client.

To do so, it is essential that banks raise RMsability to proactively manage their portfolios. Hereagain, they need to increase the number of contactswith clients and keep close tabs on their clientseconomic situations to detect quickly the first signs

of difficulty. Most RMs must be trained on thisissue and have a clear understanding of the potentialsolutions to suggest to clients, whether those solutionsbe payments postponement or even loan rescheduling(see used solutions in Figure 20).

To help them succeed with deteriorating loans, manybanks have implemented dedicated resourcesusually attached to a risk organisationto monitor


27/40

27

Figure 19 Tpes of earl-arning indicators (Ews)

banks use or soon ill use


Other

Decreasing number or

amounts of transactions

and operations

Increasing use of

credit lines

Increasing past-

due payments81%

69%

48%

29%


Figure 20 Solutions to manage performing loans

shoing first signs of deterioration


Other

Non-payment

period granted

Credit term extended

Additional

collateral required79%

74%

64%

36%


Figure 21 Etent of collection polic softening


57%

29%

14%

I Not at all I Slightly I Signicantly



Figure 18 Banks proactivel managing their

performing credit portfolios ith small

business, versus those that do not


89%

11%

I Banks with dedicated process to manageloans showing rst signs of deterioration

I Banks with no dedicated process



28/40


According to our experience, having a dedicatedorganisation in charge of soft collection is mostefficient, and 60% of banks surveyed a lso considerthis as an important factor in soft collection

effectiveness (see Figure 22). Having a dedicatedorganisation lightens RMs workload, and it is doneby dedicated staff with specific empathy and listeningskills that are different from the skills required inthe traditional collection process. That is why somebanks choose former RMs to handle their softcollections. This dedicated organisation is most oftenattached either to the risk organisation (true for 56%of surveyed banks) or to the commercial organisation.

Even for a bank with an efficient and dedicated softcollection organisation, it is important to maintain,as long as possible, the RMs contact with the clientbefore transfer to a collection unit (according to 57%

of banks interviewed).

Figure 22 e levers in soft collection (% of banks intervieed)

Other

Slow down the transfer from one stage

to another (delinquency to non-

performing loan, NPL to bad debt, etc)

Develop relational skills (such as listening

and empathy) of the collection staff

Maintain as long as possible contact

with the relationship manager

Create a dedicated structure for

soft collection (different from

traditional collection)27% 33% 60%

30% 27% 57%

18% 30% 48%

6% 15% 21%

12%

I Most important lever I Quite important lever



29/40

29

Illustration of a large European banks credit risk

management organisation at the local level

Sidebar 3

Monthly review of each RMs

credit portfolio to identify

deteriorating loans and to define

solutions between rescheduling,

soft collection, or collection

InthislargeEuropeanbank,thecreditdepartmentandRMsarejointlymanagingbehavioural

monitoringofcreditportfolios.Everymonth,theyrevieweachRMscreditportfoliotoidentifythe

deterioratingloanstobe:

1.RescheduledbytheRM,supportedbyareschedulingepert.

2.Transferredtothesoftcollectionunit.

3.Transferredtothecollectionentity.

Softcollectionismanagedbyadedicatedandcentralisedunitoverseenbytheriskdepartment;

collectionismanagedbyadedicatedcompanyoverseenbythebankinggroup:

Source: Bank interview by Capgemini, 2009.

rnl Cdt Dtmnt

(Part of the risk department)

Undtn

Assessment of

creditworthiness and decision

bhvul mntn

Screening of credit portfolios,

client by client

rschduln

Assessment of creditworthiness

and relationship manager support

ft cllctn

(Dedicated and centralised unit

overseen by the risk organisation)

Cllctn

(Dedicated company overseen by

the banking group)



30/40



31/40

3131

Moving Forard: Transforming the

Business to Reach the winning Bank Model

Chapter 3

The winning bank model will help successful banksoutperform their competitors, both on developmentand on risk management.

Each bank needs a framing phase to define its startingpoint, the target, the associated transformationroadmap, and the resulting business case. Thetransformation path to reach and implement thewinning bank model requires banks to move alongthe two axes, strengthening their RMs role, andimproving their credit risk management system.

TRASFRMAT STRATEES

A TE RM RE AxS

Banks can develop the RM roleclose clientrelationships and high empowerment on risk

managementthrough organisational or technicalmeasures, mainly by incremental steps starting withsome quick wins:

Implement first level of RM empowerment on riskmanagement (revised delegation scheme) supportedby sales force training (quick win).

Intensify client relationships and number of clientcontacts, especially by integrating contact objectivesin RMs MBO system (quick win).

Simplify product and service range and linkedprocesses.

Reduce client portfolio size, especially for

small-sized clients. Develop technical sales support (product experts).

Professionalise middle-office resources tosupport RMs.

Implement dedicated resources to support andcoach RMs on proactive credit management orsoft collection.

Most of all, to ful ly develop the RM role both interms of client relationships and risk management,successful retail banks will have to address a crucialissuethe lengthening of the RMs job duration. It

is a hard goal for retail banks to reach, taking intoaccount employee expectations in terms of careerevolution and the competitive pressures on the retailbanking employment market. Over the past fewyears, in many countries, banks have extended theirbranch networks and continued searching for morebranch managers, especially by recruiting from theranks of small business RMs. It appears that thecrisis has brought a certain amount of stability, witha longer stay in the RM job, but this is probably nota durable trend. To lengthen the RM job durationin a meaningful way, banks need to review their HR

policies by identifying different career paths for smallbusiness RMs, and provide an attractive incentivescheme to retain RMs in their jobs.


32/40


The transformation along the RM axis depends ona banks starting point. For instance, as shown inFigure 23, regarding the RM empowerment profile,61% of surveyed banks currently use the RM as a sales

managerprofile, which is not the profile consistentwith the winning bank model.

We can assume that developing the RM role will beeasier for decentralised banks than for centralisedbanks. As shown in Figure 24, decentralised banksare often cooperative banks favouring local decision-making, with strongly empowered RMs, whilecentralised banks rely on their highly process-orientedorganisations. RM as a small bankeris the dominantprofile for decentralised banks (76% adoption), butthis profile is seldom adopted by centralised banks

(only 21% adoption).

TRASFRMAT STRATEES A TE

CREDT RS MAAEMET SySTEM AxS

Banks start from varied points in terms of creditsystem information maturity, efficiency, orsophistication. Depending on their original marketposition, banks have a more or less long way to reacha performing risk management system that is alignedwith the specific needs of small business credit salesand risk management. Banks originally positioned inthe private/mass market are much further from thetargeted system than universal banks operating inthe corporate market, which only need to adapt theircorporate tools to serve the small business market.

To reach and implement a complete, effective, andefficient credit risk management system, banks canmove their efforts in three directionsdependingon their starting point and their current weaknesses:

improving governance, macro-processes, andinformation systems.

Regarding the information system, three types ofactions can be initiated:

Focus on the final users workstations and portalby first working on the seamless integration ofdatamarts and applications.

Improve data quality, relevance, and depth, toensure (for instance) accuracy and relevance of clientdata, scorecards, early-warning indicators, andreporting.

Create or increase the sophistication of tools andapplications to serve the small business market(including risk-adjusted return on capital pricingtools, scoring tools, and early-warning indicators).

As Figure 25 illustrates, specific transformationstrategies are needed that combine technical,organisational, and HR measures through quickwins, with incremental and longer term stepsnecessary along the way.

Figure 23 Bank positioning in terms of RM empoerment profile (% of banks intervieed)

Increasing level of RM empowerment in risk management

61% of banks surveyed 39% of banks surveyed

34% 27% 22% 17%

RM as a

small banker ++

RM as a

small banker +

RM as a

sales manager +

RM as a

sales manager ++



33/40

33MOINGFORWARD:TRANSFORMINGTHEBUSINESSTOREACHTHEWINNINGBANKMODEL

Figure 24 Bank positioning in terms of RM empoerment profile, depending on bank organisation


Decentralised bank

Intermediate

Centralised bank

I RM as a sales manager ++ I RM as a sales manager +

I RM as a small banker + I RM as a small banker ++

43%

30%

12% 12% 38% 38%

20% 20% 30%

36% 17% 4%


Figure 25 Transformation strategies along the to aes


Top-Dow,

iTegraTeD ba

TraDiTioa

ba

wiig ba

braC a a

ba

Transformationstrategyonthecreditrisk

managementsystemais:

Afewquickwins...followedbytechnical

measuresandlongertermsteps






Cdt sk

mnmnt systm







TransformationstrategyontheRMroleais:

Organisational,HR,andtechnicalmeasures

uickwinsandincrementalsteps

rltnsh mn l


34/40


RESUT ATS AD Ey SUCCESS

FACTRS FR TRASFRMAT TwARDS

TE w BA MDE

As Figure 26 i llustrates, banks can take different

paths to reach and implement the winning bankmodel. Banks that combine changes along thetwo axes are more likely to succeed, becausetransformation of the credit risk management systemis also a way to accelerate the transformation of theRM role. These changes rely on the implementationof technical, organisational, and HR steps, bothshort-term and long-term.

As noted, it will be easier for decentralised banks todevelop along the RM role axis, taking advantage oftheir existing ability to empower their RMs to build

close relationships with clients.

Beyond the need to design an appropriatetransformation path, the successful transformationtowards the winning bank model also dependson a bank s ability to set up robust and relevantchange management.

According to a survey completed by CapgeminiConsulting and the Economist Intelligence Unit(Trends in Business Transformation, 2007),interviewed executive managers reckoned thatsupport from senior management, alignment with abanks overall strategy, and buy-in from employeesare the most important factors in a successfultransformation. We therefore believe that retail banksthat want to succeed in their transformation and be atthe forefront of the small business market must takethe four following change-management actions(see Figure 27):

Set a shared vision and ambition.

Design the transformation strategy.

Build the guiding coalition.

Create the conditions for collective commitment.

M FRwARD

The implementation of the winning bank modelalong with all the supporting measures ensuringits efficiencyis the best way for retail banks

to master risk while maintaining high businessdevelopment, outperforming other banks in thesmall business market.

This 2010 edition of the World Retail Banking Reporthas attempted to shed light on the key issues retailbankers will have to consider as they seek to addressthe challenges brought to the fore by the globalfinancial and economic crisis. Retail bankers faceserious challenges ahead, and we hope the insightsthis report contains will prove to be valuable insupporting effective decision-making.


35/40

35

Figure 26 Banks transformation paths to reach the inning bank model


Figure 27 e change-management actions for successful transformation

Source: Capgemini Consulting, Transformation University, 2010.

t shd vsn

nd mtn

Dsn th

tnsfmtn

stty

buld th

udn cltn

Ct th

cndtns f

cllctv cmmtmnt

Designandconductsteps

focusedontheprojectvision

Identifythekeyconditionsfor

asharedambition

Rapidlyagreeonfederative

priorities

Positionallconcernedactors

withrolesclearlyidentified

Developcollectiveskillsofthe

leadingteam

Developtransformationskills

ofprojectteams

Assesstransformationreadiness

Identifytransformationsuccess

factorsspecifictothebank

Benchmarkthistransformation

strategy

Structurethekeymomentsof

themobilisation

Addressthesekeymoments

throughstrikingevents

Organiseskillstransfersand

trainingallalongtheproject

Top-Dow,

iTegraTeD ba

TraDiTioa

ba

wiig ba

braC a a

ba

Severaltransformationpathsfor

traditionalbanks,movingalternatively

alongthetwoaesandcombining

technical,organisational,andHRsteps

Typicaltransformationpath

foradecentralisedbank

MOINGFORWARD:TRANSFORMINGTHEBUSINESSTOREACHTHEWINNINGBANKMODEL






Cdt sk

mnmnt systm

rltnsh mn l








36/40



37/40

37

Figure M1 Bank intervies, b geograph

I Europe Eurozone I Europe Non-EurozoneI North America IAsia-Pacic

48%

33%

10%

9%


Figure M3 Annual client turnover surveed banks

selected to define their small business

market (% of banks intervieed)

I Less than 5m I From 5m to 10m I More than 10m

57%30%

13%


MethodologyWe based our small business spotlight analysis on twoinvestigations: a market survey and bank interviews. Thebank questionnaires contained three sectionsactivityoverview, development issues, and risk managementissueswith qualitative and quantitative questions.

We conducted 58 interviews in large retai l banks in 21selected countries around the globe: Austria, Belgium,China, Croatia, Czech Republic, France, Germany,Hong Kong, India, Ireland, Italy, the Netherlands, Poland,Romania, Russia, Slovakia, Sweden, Turkey, United ArabEmirates, United Kingdom, and United States (see Figure

M1 and bank list at the end of this report). Executiveswho participated were from both the risk managementand marketing departments.

We began with the European Commission definitionof small business, which encompasses small-sized andmicro-sized enterprises (see Figure M2).

From a practical standpoint, however, banks use varieddefinitions for what constitutes a small business (see FigureM3). Of the banks surveyed, 57% expressed the upperlimit of clients annual turnover as 5 million, 30% usedthe 510 million bracket, while 13% used an upper limitthat exceeded 10 million.

For most banks surveyed, the small business market ismanaged entirely by the retail bank; however, for a fewbanks, larger small business clients are managed by the

corporate bank.

Figure M2 European Commission small and medium enterprise thresholds

Source: European Commission Recommendation 2003/361/EC.

mll nd Mdum ents mnttn mnt Thshlds

Annualturnover:210million

Employees:1049

Annualturnover:1050millionEmployees:50249

Annualturnover:02million

Employees:09

Mdum-

szd

mll-szd

ntss

Mc-szd

ntssSMAllBUSinESS


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CAEM

Capgemini, one of the worlds foremostproviders of consulting, technology andoutsourcing services, enables its clients totransform and perform through technologies.Capgemini provides its clients with insights

and capabilities that boost their freedom toachieve superior results through a uniqueway of workingthe Collaborative BusinessExperience. The Group relies on its globaldelivery model called Rightshore, whichaims to get the right balance of the best talentfrom multiple locations, working as one teamto create and deliver the optimum solutionfor clients. Present in more than 30 countries,Capgemini reported 2009 global revenuesof 8.4 billion and employs 90,000 peopleworldwide. More information is available atwww.capgemini.com.

Leveraging deep industry expertise withthe power of advanced Rightshoreglobal delivery, Capgemini can meet theincreasingly sophisticated needs of thefinancial services sector. With a network of15,000 professionals working for more than900 clients worldwide, Capgeminis FinancialServices sector provides transformationalsolutions in Banking, Insurance and CapitalMarkets, and provides industry recognizedthought leadership.

For more information:www.capgemini.com/financialservices

UCREDT

UniCredit is a major international financial institution withstrong roots in 22 European countries as well as representativeoffices in 27 other markets, with approximately 10,000 branches,more than 166,000 employees at 30 September 2009.

In the CEE region, UniCredit operates the largest internationalbanking network with approximately 4,000 branches and outlets.

The Group operates in the following countries: Austria,Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, theCzech Republic, Estonia, Germany, Hungary, Italy, Latvia,Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia,Serbia, Slovakia, Slovenia, Turkey and Ukraine.

For more information: www.unicreditgroup.eu

EUREA FACA MARET ASSCAT

Efma promotes innovation in retail finance in Europe byfostering debate and discussion among the main players involvedin change. Formed in 1971, Efma comprises 2,960 differentbrands in f inancial services worldwide today, including 80% ofthe largest European banking groups.

Through regular events, publications, and its comprehensivewebsite, the association provides retail f inancial serviceprofessionals with answers to their questions about the mainissues at stake in their business: multidistribution strategies,customer approach, CRM, product and service marketing andimproving profitability.

Efma is above all a dynamic association, providing a greatopportunity for discussion and exchanges without anycommercial constraints. It provides its members with a widerange of exclusive services as well as discount rates on non-gratuitous activities. The loyalty of its members as well as theirpermanent financial support are the best proof of its efficiency.

For more information: www.efma.com

About Us


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ABNAMRO

BancaTransilvania

BankofIreland

BanquePopulaire

Barclays

BAWAGPSK

CaissedEpargne

CECBank

esk Spoitelna

CreditoEmiliano

ErsteBank

Finansbank

FortisBankNederlandFrankfurterSparkasse

GarantiBank

GroupeBNPParibas*

GroupeCrditAgricole *

GroupeCrditMutuelCIC

HypoAlpe-Adria-Bank

ICICIBank

INGBelgium

KBC

LandesbankBerlin

Nordea

Rabobank

Raiffeisenbank*

RegionsBank

SEB

Swedbank

TatraBanka

TaunusSparkasseUBIBanca

UniCreditGroup*

USBank

olksbankSlovensko

Capgeminiwouldparticularlyliketoetenditsthankstothe58banksthat

allowedustointerviewtheireecutivesforthisreport,including:

Wewouldalsoliketothankallthepeoplewhosecollaborationmadethis

reportpossible:theDevelopmentTeamforanalysing,writing,andcompiling

thefindingsofthereport:OlivierDucass,FrdricRou,uitterieNielly,and

MaimeLeGuil;thefollowingcontributorsforprovidingtheirinsights,epertise,

andguidance:LorenaBortoletto,RomanChromik,AntoninoDelGatto,Asli

Duenli,MarionLecorbeiller,RenatoMartini,CarmeloMinardi,CynthiaPanas,

JacquesRicher,andMichaelSchindler;SidSeamansforeditingthereport;and

ourLocalSurveyContributorsforalltheirassistance.

*Interviews in two or more countries per bank:

UniCredit Group (UniCredit Banca, UniCredit Banca di Roma and Banco di Sicilia, HypoVereinsbank in Germany,

Bank Austria, UniCredit Bank in Czech Republic, UniCredit Bank in Russia, Zagrebacka Banka in Croatia, Yap

Kredi Bank in Turkey); Groupe BNP Paribas (BNP Paribas in France, BNP Paribas Fortis in Belgium, Fortis in

Turkey); Groupe Crdit Agricole (Crdit Agricole in France and Belgium, Cariparma Crdit Agricole in Italy);

Raiffeisenbank (Raiffeisenbank in Austria, Raiffeisen International in Russia and in Croatia).


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For more information, please contact:

[email protected]

[email protected]

[email protected]

For press inquiries, please contact:

Capgemini EuropeandRest of World

.capgemini.com/rbr10

.rbr10.com

Visit

emm ds

[email protected]+44(0)2070670512

Mn cll

[email protected]+33612730344

Capgemini North America

JennyGrendel

[email protected]

or+12124458187

s buhn

[email protected]

or+13124518338

UniCredit

rnt Vch

[email protected]

or+390288628672

world retail banking report 2010

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