Efma journal articles
Article for members
EFMA Magazine n°222 november december 2009
Products and Markets
SME Banking - A long-term healthy growth potential in CEE
Helge Böschenbröker, Director, zeb/rolfes.schierenbeck. associates, Germany
On average, 99.7 of 100 companies operating in each of the European Union’s 27 countries, SMEs and Micros generate more than two-thirds of all jobs, many of them in rural areas, and 60% of value added —with varying shares in different industrial sectors. The large number of small and medium sized companies also offers enormous potential for banks.
To explore current trends in SME banking in CEE, zeb/ together with Efma and ERSTE surveyed 60 banks in Croatia, Czech Republic, Hungary, Poland, Russia (Moscow), Serbia, Slovakia and Ukraine, many of them among the top 10 in their country. In addition 25 senior SME bankers were interviewed and asked about their view on SME banking.
From acquisition to profitability. In the past, banks’ business focus was on lending. The opportunity to sell loans coupled with an easy access to refinancing led to an unbalanced income structure, with income (before OPEX and risk cost) from loans (45%) outweighing other income sources like deposits (15%) and transaction fees (30%). The high demand and dynamics of national economies, strong competition for market share and prevailing lack of appropriate tools and data for proper risk assessment resulted often in less cautious credit decisions made by banks. The strong growth of the loan portfolio can still be observed in the year 2008: 60% of the surveyed banks increased the volume of loans to SMEs in 2008 by 20% or more.
Tightened credit policies, a direct reaction to the current economic slowdown, in combination with lower demand for credit from companies, resulted in a reported drop of 50% or more in new sales in the first half of 2009 compared to the same period in 2008. While tightening of credit policies can rather be seen as a short-term reaction, many of the interviewed bankers furthermore see the necessity to refine their strategy and to put a clear focus on growing profitability with the existing client base instead of focussing on acquisition of new clients.
Financial crisis — What has changed? It should come as no surprise that 74% of the polled bankers name the “Impact of financial crisis” and 50% the “Current macroeconomic environment” as the biggest threats to SME banking. When asked about the impact of the current crisis, 69% see the “worsened quality of the loan portfolio” as a major problem. Another worrying factor for most banks (65%) is the sharp drop in sales which has arisen due to SMEs not meeting the banks’ (increased) requirements for financing as well as the lower demand due to clients still awaiting further development. Lower new business volumes and higher defaults increased pressure on banks significantly, as the main levers for profitability of SME banking, both the income and the risk costs, are dramatically impacted.
Not to see things only negative, the banks see also opportunities resulting from the crisis; approximately two-thirds of the surveyed banks see an opportunity to present themselves as a strong partner for their clients in “less favourable conditions”, a strong partner, who is willing to support clients, where meaningful and feasible, and to grant loans to (selected) clients. All in all 94% of the banks stated that they will keep their strategic focus on SMEs.
Key success factors for profitable SME banking. One essential point for a successful SME banking is the deep understanding of client needs and expectations. Small enterprises are often managed by their owners. They expect among other things a long lasting relationship thanks to personal contact, proactive actions thanks to a deep understanding of entrepreneurial thinking, solutions (instead of products) and fast decisions. While expectations may be different due to different sizes of enterprises or due to regional specifics, banks confirm that meeting of clients’ expectations is a key success factor in SME banking: 71% of the interviewed banks see “Service quality” and 62% “Personal relationship” as top key success factors.
To support implementation of a client centric sales concept, with positive impact on perceived quality of service and personal aspect of this banking business, we see the necessity to put into operation a straight-line target group management (for each segment). Client sub-segmentation using the current profitability, the currently not used earning potential and the risk of the client as main parameters would enable that. This approach allows for identification of different tactic clusters, e.g. “Intensification”, “Retention” or “Exit”. The advisory approach for each cluster defines the (financial) targets, the activities (e.g. number of client meetings per year, different types of client meetings) and the tools (e.g. conversation guides).
From our experience and confirmed by many interview partners, we see that a centrally planned and managed approach in combination with close leadership is a key success factor for a consistent and broad implementation.
To see banks’ efficiency in sales, cross-selling-ratios were also surveyed. One of the main drivers for cross-selling is the available net-sales-time of client advisors. Following the survey results, we see three main drivers for improving net-sales-time: the implementation of an assistance-role increases the net-sales-time on average by 15%. Approximately the same improvement can be achieved by centralising back-office functions. The third lever that allows for an approximately 30% increase is the implementation of an IT-based workflow that covers the whole loan process. A prerequisite for achieving most of the benefits from centralization and workflow based processing is standardisation of processes and a clear split of responsibilities between front-office, risk-management and back-office. Product portfolio variety can be considered as another driver for improving cross-selling ratios. Banks with focused product portfolios have on average better cross-selling-ratios (2.9) than those that offer a huge variety of products (2.4).
Another efficiency driver that deserves to be mentioned here is the organisational setup. Banks that implement SME business as an “independent” business line are more successful than those that incorporate SME banking to corporate or retail business lines. The evidence suggests, that a distinctive strategic focus on SME banking supports the ”know your client” idea, moreover bringing in higher service quality levels and better base for a long term successful relationship management.
Outlook. In spite of the current economic slowdown we anticipate higher growth rates in CEE than in Western Europe, both mid and long-term. As the SME sectors are at least linked to, if not major drivers of this development, this should result in a larger number of reputable medium-sized players in many markets, addressing credit institutions with increasing demands for financing, advisory, products and services. To prepare themselves for future growth and to be in a good shape once the slowdown turns into a growth again, banks should start to refine their business model for SME banking soon. Successful banks will focus their activities on the most promising clients and will establish advanced sales- and service-models for their SME clients. Achieving transparency about current client portfolios and efficiency/productivity levels is a necessary first step to take.
To explore current trends in SME banking in CEE, zeb/ together with Efma and ERSTE surveyed 60 banks in Croatia, Czech Republic, Hungary, Poland, Russia (Moscow), Serbia, Slovakia and Ukraine, many of them among the top 10 in their country. In addition 25 senior SME bankers were interviewed and asked about their view on SME banking.
From acquisition to profitability. In the past, banks’ business focus was on lending. The opportunity to sell loans coupled with an easy access to refinancing led to an unbalanced income structure, with income (before OPEX and risk cost) from loans (45%) outweighing other income sources like deposits (15%) and transaction fees (30%). The high demand and dynamics of national economies, strong competition for market share and prevailing lack of appropriate tools and data for proper risk assessment resulted often in less cautious credit decisions made by banks. The strong growth of the loan portfolio can still be observed in the year 2008: 60% of the surveyed banks increased the volume of loans to SMEs in 2008 by 20% or more.
Tightened credit policies, a direct reaction to the current economic slowdown, in combination with lower demand for credit from companies, resulted in a reported drop of 50% or more in new sales in the first half of 2009 compared to the same period in 2008. While tightening of credit policies can rather be seen as a short-term reaction, many of the interviewed bankers furthermore see the necessity to refine their strategy and to put a clear focus on growing profitability with the existing client base instead of focussing on acquisition of new clients.
Financial crisis — What has changed? It should come as no surprise that 74% of the polled bankers name the “Impact of financial crisis” and 50% the “Current macroeconomic environment” as the biggest threats to SME banking. When asked about the impact of the current crisis, 69% see the “worsened quality of the loan portfolio” as a major problem. Another worrying factor for most banks (65%) is the sharp drop in sales which has arisen due to SMEs not meeting the banks’ (increased) requirements for financing as well as the lower demand due to clients still awaiting further development. Lower new business volumes and higher defaults increased pressure on banks significantly, as the main levers for profitability of SME banking, both the income and the risk costs, are dramatically impacted.
Not to see things only negative, the banks see also opportunities resulting from the crisis; approximately two-thirds of the surveyed banks see an opportunity to present themselves as a strong partner for their clients in “less favourable conditions”, a strong partner, who is willing to support clients, where meaningful and feasible, and to grant loans to (selected) clients. All in all 94% of the banks stated that they will keep their strategic focus on SMEs.
Key success factors for profitable SME banking. One essential point for a successful SME banking is the deep understanding of client needs and expectations. Small enterprises are often managed by their owners. They expect among other things a long lasting relationship thanks to personal contact, proactive actions thanks to a deep understanding of entrepreneurial thinking, solutions (instead of products) and fast decisions. While expectations may be different due to different sizes of enterprises or due to regional specifics, banks confirm that meeting of clients’ expectations is a key success factor in SME banking: 71% of the interviewed banks see “Service quality” and 62% “Personal relationship” as top key success factors.
To support implementation of a client centric sales concept, with positive impact on perceived quality of service and personal aspect of this banking business, we see the necessity to put into operation a straight-line target group management (for each segment). Client sub-segmentation using the current profitability, the currently not used earning potential and the risk of the client as main parameters would enable that. This approach allows for identification of different tactic clusters, e.g. “Intensification”, “Retention” or “Exit”. The advisory approach for each cluster defines the (financial) targets, the activities (e.g. number of client meetings per year, different types of client meetings) and the tools (e.g. conversation guides).
From our experience and confirmed by many interview partners, we see that a centrally planned and managed approach in combination with close leadership is a key success factor for a consistent and broad implementation.
To see banks’ efficiency in sales, cross-selling-ratios were also surveyed. One of the main drivers for cross-selling is the available net-sales-time of client advisors. Following the survey results, we see three main drivers for improving net-sales-time: the implementation of an assistance-role increases the net-sales-time on average by 15%. Approximately the same improvement can be achieved by centralising back-office functions. The third lever that allows for an approximately 30% increase is the implementation of an IT-based workflow that covers the whole loan process. A prerequisite for achieving most of the benefits from centralization and workflow based processing is standardisation of processes and a clear split of responsibilities between front-office, risk-management and back-office. Product portfolio variety can be considered as another driver for improving cross-selling ratios. Banks with focused product portfolios have on average better cross-selling-ratios (2.9) than those that offer a huge variety of products (2.4).
Another efficiency driver that deserves to be mentioned here is the organisational setup. Banks that implement SME business as an “independent” business line are more successful than those that incorporate SME banking to corporate or retail business lines. The evidence suggests, that a distinctive strategic focus on SME banking supports the ”know your client” idea, moreover bringing in higher service quality levels and better base for a long term successful relationship management.
Outlook. In spite of the current economic slowdown we anticipate higher growth rates in CEE than in Western Europe, both mid and long-term. As the SME sectors are at least linked to, if not major drivers of this development, this should result in a larger number of reputable medium-sized players in many markets, addressing credit institutions with increasing demands for financing, advisory, products and services. To prepare themselves for future growth and to be in a good shape once the slowdown turns into a growth again, banks should start to refine their business model for SME banking soon. Successful banks will focus their activities on the most promising clients and will establish advanced sales- and service-models for their SME clients. Achieving transparency about current client portfolios and efficiency/productivity levels is a necessary first step to take.
