Opening retail banking for mortgage loan products in

emerging markets

Dr. Friedemann Roy

Vancouver, 21 September 2006

231.07.2015 .

Outline of presentation

Demand for mortgage loan products in emerging markets

Case studies

– Serbia: moving into the primary market

– Armenia: shaping capital market development*

Conclusion

*Both projects are commissioned by KfW, Frankfurt

331.07.2015 .

Demand for mortgage loans in

emerging markets (I)

The potential:

By 2008, number of bankable households will rise from 349m to 415m

In BRIC countries, loans to individuals expected to reach USD 1,800

billion by 2009*

Central and eastern Europe: rising volume of housing loans from

almost non-existent base

The drivers:

Economic incentives: growth, improving legal framework, declining

interest rates

Technological change: internet, risk management capacities

*The Banker, Bring me your consumers, your unbanked masses, June 2006

431.07.2015 .

Opportunities for (foreign) banks entering these markets:

Untapped markets: wider profit margins than in corporate banking

Many domestic banks lack expertise and knowledge of products

Critical factors:

Partnerships between major players and local banks may facilitate

market entry

Three areas of excellence: market and product management,

distribution as well as service and fulfillment

Use of cross-selling efforts and technological infrastructure

Demand for mortgage loans in

emerging markets (II)

531.07.2015 .

Case study Serbia - which factors

drive the primary market?

Economy in 2006:

• Decent GDP growth

• Inflation at double digit rates

Banking sector:

• Fundamental transition driven

by foreign banks

• Rapid credit growth

• Small capital and money markets

Housing sector:

• High demand for new housing in

urban areas

• Strong demand for home improvements

• Housing affordability still low

Primary market:

• Lending gained momentum

but still modest (0.3% of GDP)

• Market driven by foreign banks

• Governments provides support

• Credit bureau existing

• Various obstacles:

• Large number of

unregistered properties

• Bumpy registration process

• No appraisal standards

• Foreclosure is costly

and time consuming

631.07.2015 .

Loan conditions and

underwriting criteria in Serbia

Loan conditions:

– Loan amount: min. EUR

10,000 up to EUR 200,000

– Currency clause: CSD

indexed to EUR

– Term: up to 30 years

– Interest rate: 7.95% to 10%

(without insurance by

National Insurance

Corporation and government

subsidies)

– Down payment: 20 %

Underwriting criteria:

– LTV ratio: 70 - 80%

– Collateral: mortgage and 1 to

2 guarantors, promissory

note, salary retention

– PTI ratio: 30 % (some banks

accept higher PTI ratio)

– Most banks assess

creditworthiness on official

income

– Insurance: most banks

require property insurance

– Fees: up to 2 % of loan

amount

731.07.2015 .

Introducing mortgage loans in

the Serbian market

Our Vision:

Develop originators of

mortgage assets

Our value proposition:

1. Market assessment and SWOT analysis

2. Definition of market entry strategy

3. Product design

4. Preparing for implementation

5. Product launch and review work

1. Minimum quality

Standards

2. IT architecture

3. Marketing

4. Training

831.07.2015 .

Case study Armenia - which factors

influence capital market development?

Economy in 2006:

• Strong GDP growth

• Inflation is modest

Banking sector:

• Sector has gained its footing

• Lending is steadily creeping up

• Capital market dominated

by government securities

Housing sector:

• A lot of new of new construction,

especially in Yerevan

• Strong demand for home improvements

• Weak housing affordability

Mortgage loan market

• Market experienced considerable

growth during last 3 years

• Market driven by rising demand

and competition

• Credit bureau existing

• Legal framework is in

good shape

• Various obstacles:

• Lack of long-term funding

• High interest rates

• No experience yet with new

legislation on foreclosure

931.07.2015 .

Loan conditions and

underwriting criteria in Armenia

Loan conditions:

– Loan amount: on average

USD 15,000 - 20,000

– Nearly all lending in USD,

some in AMD

– Term: most common 5 - 7

years, maximum 10 years

– Interest rate: 11 to 15 %

– Down payment: 30 - 50 %

Underwriting criteria:

– LTV ratio: 50 % - 70%

– Collateral: mortgage

– PTI ratio: 35 - 40 % (some

banks accept higher PTI

ratio)

– Some Lenders also take into

consideration hidden

incomes

– Insurance: only some

lenders require life and

building insurance

1031.07.2015 .

Housing Finance

Training Programme

Special courses

• for loan officers

• for management

• on risk management

Establishment of

Housing Finance

Refinancing Window

• Participation of

qualified institutions

• Funding subject to

specific conditions

Customised training

of partner financial

institutions

• Modelled along the

Armenian Minimum

Quality Standards

Project outline

Preparing lenders for the primary

and secondary market

1131.07.2015 .

Mimicking the secondary market (I) –

allocation and commitment

Refinancing

window

Funding Allocation

Informs about refinancing rate

Partner financial

institution (PFI)

Commitment request

for refinancing

Approves and informs

1

2

3

4

Refinancing

window

Partner financial

institution (PFI)

1231.07.2015 .

Mimicking the secondary market (II) –

refinancing of mortgage loans

Delivers mortgage loans

Funding

Penalty

PFI

Does not deliver loan

within commitment period

Compliant with

Mortgage Loan

Eligibility Criteria

including MQS?Yes

No PFI

PFI

Rollover of unused commitments

5

6

7

Refinancing

window

1331.07.2015 .

Conclusion

Potential in both markets is clear

– Stabilising economy and improving economic conditions enable

housing investments

Offering opportunities for banks

– Serbia: foreign banks drive market development

– Armenia: competition and demand accelerate entry of lenders into

retail markets

Some critical factors to look at

– Serbia: purchase of domestic banks facilitated market entry of

foreign banks

– Serbia: improvement of legal and institutional framework?

– Armenia: only banks with outstanding service quality and sound risk

management practices will survive

– Armenia: how robust is economy in case of macroeconomic shocks?

Dr. Friedemann Roy

Bankakademie e.V.

Sonnemannstraße 9-11

D-60314 Frankfurt am Main

T +49-69 154008-622

F +49-69 154008-670

E-Mail: roy@bankakademie.de