Customer Management in SME Banking

Qamar Saleem Head of SME Banking, ANB

IFC MENA SME Conference

January 2012

Strategies and Practical Insights

Arab National Bank

Arab National Bank was established in 1979

Amongst the 10 largest banks in the Middle East

183 branches across the Kingdom; including 42 ladies branches/sections; 1 branch in London

85 TeleMoney centers specializing in remittances business; 2nd largest market player

Net profit $ 579 million in 2011; customer deposits of $ 23.4 billion; total assets of $ 31.4 billion

3 Subsidiaries: – ANB Invest – 100% owned, investment vehicle to manage

bank’s investments, securities handling – Arab Heavy Equipment leasing – 62.5% owned, leasing

(Islamic) – Saudi Home Loan Company – 40% owned – Islamic home

and real estate finance team

Current Credit Ratings: Standard & Poor : A; Moody's : A1; Fitch : A; Capital Intelligence : A+

Nearly 3,500 employees across the Kingdom

The Bank is committed to significantly enhance its SME business across the Kingdom

2

SME Market in Saudi Arabia

3

Nearly 1.1 million registered entities in the country; 0.8 million are operative

Wholesale and Retail Trade (~72%); Building & Construction (~21%); Transportation, Storage and Cooling (~6%) key SME activity sectors

3 prime geographies housing SME population; Riyadh (31%), Makkah (25%), Eastern Province (17%)

No uniform definition of SME; turnover ceiling of $ 8 million for obtaining Kafalah backing (government guarantee program) used widely

Within the turnover $ 8 million sales bracket, 0.4 million entities deemed as bankable

SME Market Revenue Pool estimated at $ 1.2 billion; Lending 31%, Transactional 40%, Deposits 29%

Limited SME proposition offering by commercial banks

Lending to SMEs forms nearly 1.8% of the total lending by banks; expected to grow as public sector projects rolled out

SME lending ~ $ 4 billion; liabilities ~ $ 25 billion; Significant government focus aiming to reach SME lending level of $ 80 billion in 5 years

Building blocks & customer focus

4

Process

Systems Business Underwriting CRM

People

Structure Training Scorecards Deployment

Proposition

Service Transactional Credit Treasury Strategic

Intent

Functional fit

Investment Capacity

Change

readiness

Initiative significance

Revenue Pool

Competitive positioning

Economic dynamics

Regulatory

environment

Government focus

In an effort to strike this sensitive balance, customer centricity can potentially be impacted

Internal factors

External factors

0

Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

SME is a highly structured business

Proficiency across 9 key areas is required effectively manage customers

Customer Management

9 key models:

• Relationship Management: Tiered structure & KPIs

• Customer Acquisition: Prospecting, sales, handover

• Customer Servicing: telephone hotlines, service team, alternate channels migration

• Product Development: Lending, trade, transactional, treasury

• Credit Risk: Credit evaluation engine, Portfolio monitoring, Collections

• Operational Risk: AML, Transactional, error rates

• People Alignment: Certification program, Scorecards, sales toolkits

• Information & Analytics: CRM tools, KPIs, risk analytics

• Communication: Branding, Collateral, market visibility, welcome packs

Relationship Management

Customer Acquisition

Customer Servicing

Product Development

Credit Risk Operational Risk

People Alignment

Information & Analytics

Communication

5 Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

6

Approaches to segmentation

Profitability Focused at distributing

customers into

“revenue to bank” tiers

Industry Focused at finding

attractive market

sectors with

homogeneous needs

Turnover Simply segmenting

customers with respect

to their size in terms of

sales turnover

5 key approaches to

market segmentation;

a mixed approach

seen more in practice

Need based Geared towards

forming customer

cluster groups of

similar need profile

Geography Aimed at Segmenting

customers based on

their locations

Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

7

Industry based segmentation

Prioritization criteria illustration Rank industries based on:

– Total sales revenue – 3 year CAGR – Gross Profit Margins – Through the cycle credit

performance

Select industries based on sizable presence of SMEs and industry growth rates higher vis-à-vis country GDP

Double-check to ensure the priority industries based on – Industry outlook – Exclusions due to credit policy – Level of government support – Barriers to entry (such as

Franchises and co-operatives) – Revenue pool/ wallet size

Calculate revenue pool of High and Medium industries based on earlier classification

Knock-out low potential industries

Estimate revenue pools of selected industries (By assets, Liabilities, Trade and FX income)

Sequence industries in order of: – Income potential – Industry growth outlook – Industry credit performance

Top 3 - 5 industries Including attractive liabilities only industries

30

Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

• Cheque payments

• Debit Cards

• Bank Transfers

• WCF & trade finance

• FX Conversions

• Electronic Banking

• Credit Cards

• Bill Payments

• Payroll

• Documentary Collection

• Receivable discounting

• Factoring

• Export bills discounting

• Cheque purchasing

• Credit Insurance

• Import Collection

• Letters of credit

• Guarantees

• FX hedging

• Purchase order finance

• Insurance

• Cash handling

• Cheques handling

• Inward transfers

• Liquidity Management

• Investment solutions

• Fixed deposits

• Savings Accounts

• FX conversions

• Merchant/POS services Get Paid

Buy Resources

Pay for resources

Sell goods & services

Customer banking needs cycle

8 Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

Import corporate and retail products, and channels customising for appropriateness

Move talented people, idea transfer natural outcome

Product Transfer

Whitespace

‘Obvious’ needs, wants or demands not being met by competitors

Localise solution for a market based on approach of banks in other countries

Build out product bundles to cater to business and personal needs

Critical when establishing or managing small business asset products

Joint segment and product management improves outcomes

Product Management Disciplines

Product Lifecycle

Focus on building out base product set, focusing on service and reliability

Increase automation for efficiency and cost management

Hygiene before differentiation Active management of annuity income

products crucial for sustained high growth

Product &

Channels

Product Transfer

Product Lifecycle

Whitespace

Sourcing Product Development Initiatives

Additional considerations

Organizational dynamics

Revenue recognition

Product management

9

50

Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

Achieving sustainable profitability

Revenue Management – Optimal wallet share

– Products per customer

– Cross selling & bundling

– Activity & sales Management

– Acquisition sales discipline

– RM toolkits & certifications

Cost Management – Customer profitability tiers

– Resources alignment metric

– Defined productivity KPIs

– Multi products frontline team

– Standardization

– Performance linked remuneration

Risk Management – Credit & behavior Analytics

– Differentiated ME & SB models

– Segmental diversification

– Operational risk triggers tracking

– Dedicated SME Credit set-up

– Portfolio churn

10

85

Lending, 27%

Transactional, 32%

Deposit, 40%

Lending, 21%

Transactional, 52%

Deposit, 28%

0

0.5

1

1.5

2

2.5

3

3.5

4

2005 2006 2007 2008

Revenue

Cost

LI

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Revenue

Cost

LI

Note: Above figures scaled to revenue index at starting point

HSBC SME Set-up executed

Standard Chartered SME Set-up executed

Plan Structure Segment Understand

Needs Tailor

products

Achieve & sustain

profitability

In Summary

11

SME is a highly structured business; achieving and maintaining customer

centricity is key to sustainable business success

Multiple area proficiency and strong framework across Proposition, People and

Process disciplines is required for effective customer management

Customer segmentation is crucial and a key factor driving the business and credit

operating model as well as SME organisational fit

Understanding the customer needs cycle in the realm of his own business helps

define participation model and strategic orientation

Product development and bundling should be aligned to segment & customer

needs and optimize on institution's product and infrastructure availability

Sustainable business profitability can be achieved through disciplined

approaches and specific tools across Revenue, Cost and Risk Management