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Financial Year 2003 Results and Outlook for the Future

Financial Year 2003 Results and Outlook for the Future. Company presentation. April 2004. TABLE OF CONTENTS. Company profile in the context of the Polish banking market 2003 results Key elements of the program to improve asset quality and arrange credit risk Corporate portfolio

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Financial Year 2003 Results and Outlook for the Future

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  1. Financial Year 2003 Results and Outlook for the Future Company presentation April 2004

  2. TABLE OF CONTENTS • Company profile in the context of the Polish banking market • 2003 results • Key elements of the program to improve asset quality and arrange credit risk • Corporate portfolio • Retail portfolio • Action plan • Key elements of the restructuring process for 2004 • Key retail commercial drivers for 2004

  3. CAGR 1999-2002 = 26.4% LOAN PORTFOLIO GREW BY MORE THAN 26% PER YEAR • CONSOLIDATED 19,029,000 17,910,500 • KB Ukraine • Kredyt lease 15,099,665 11,245,463 • Corporate Bank 8,868,266 • Zagiel • Retail Bank

  4. IRREGULAR LOANS INCREASED FURTHER IN 2003. BASED ON A THOROUGH PORTFOLIO REVIEW, KB HAS INCREASED PROVISIONS • Irregular loans • PLN million • Provisions of irregular loans • 19,029 • 18,539 • 18,129 • 16,054 • 52.7% • 42.5% • 43.0% • 39.6% • 2001 • 2002 • 3Q 2003 • 2003

  5. Average peer group* • Kredyt Bank • Coverage ratio Kredyt Bank • Coverage ratio peer group* KB HAS ACHIEVED A CONSERVATIVE POSITION IN TERMS OF PROVISIONS • Irregular loan ratio • Coverage ratio * Peer Group : Pekao SA, BPH PBK, Bank Handlowy, ING Bank Slaski, BZ WBK, Bank Millenium and BRE Bank ** Year 2003 based on incomplete data for Peer Group

  6. COMPARISON TO MARKET SHOWS THAT KB HAS TAKEN A RELATIVELY CONSERVATIVE POSITION IN TERMS OF PROVISION • Irregular loan ratio in percent; 2003 • Coverage ratio • BZ WBK • BRE Bank • BPH PBK* • Pekao SA • Bank Millennium* • Kredyt Bank • Handlowy Citi* • ING BSK* * Based on latest quarterly information

  7. KEY REASONS FOR ADDITIONAL PROVISIONING • Actions in 4Q 2003 • Loan review identified potential problem loans • Collateral policy changes – strengthening of verification of collateral valuation • Provisioning requirements of directive of finance ministry treated as minimum, not as maximum • Resulting into creation of additional loan provisions of PLN 1,158.6 million on consolidated basis • Facts • Rapid loan growth outpacing competition • Late recognition of problem loans • Acceptable average coverage ratio • Decline of collateral value • Growth of foreign exchange rate affecting FX credits

  8. TABLE OF CONTENTS • Company profile in the context of the Polish banking market • 2003 results • Key elements of the program to improve asset quality and manage credit risk • Corporate portfolio • Retail portfolio • Action plan • Key elements of the restructuring process for 2004 • Key retail commercial drivers for 2004

  9. OVER 2003, KB’S CORPORATE PORTFOLIO DETERIORATED TO 32% OF NONSTANDARD LOANS • CONSOLIDATED December 31 2002 December 31 2003 100% = PLN 13,781,861 100% = PLN 13,735,611 • Loss • Loss • Doubtful • Substandard • Doubtful • Substandard • Normal and under observation • Normal and under observation

  10. Exposure • Provisions FOR EACH OF THE RISK CATEGORIES, PROVISIONING RATE HAS BEEN INCREASED December 31 2002 December 31 2003 77% 53% 25% 9% 17% 7% Substandard Doubtful Loss Substandard Doubtful Loss

  11. CORPORATE LOAN PORTFOLIO IS CONCENTRATED • Total number of customers: 9,252 • KREDYT BANK ONLY Top 1% of customers = 51% of exposure Top 20% of customers = 94% of exposure • Percentage of exposure • Percentage of number of customers

  12. TABLE OF CONTENTS • Company profile in the context of the Polish banking market • 2003 results • Key elements of the program to improve asset quality and manage credit risk • Corporate portfolio • Retail portfolio • Action plan • Key elements of the restructuring process for 2004 • Key retail commercial drivers for 2004

  13. 82% OF THE RETAIL PORTFOLIO IS HEALTHY • CONSOLIDATED December 31, 2002 December 31, 2003 100% = PLN 4,458,612 100% = PLN 4,112,653 • Loss • Loss • Doubtful • Doubtful • Substandard • Substandard • Normal • Normal

  14. MORTGAGE LOANS, CONSUMER FINANCE AND CASH LOANS ARE THE KEY PRODUCTS IN RETAIL • KREDYT BANK AND ZAGIEL December 31, 2001 December 31, 2003 100% = PLN 3,523,598 100% = PLN 4,458,612 • Other • Other • Mortgage loans • Consumer finance (Zagiel) • Mortgage loans • Car loans • Consumer finance (Zagiel) • Cash loans • Cash loans • Car loans

  15. TABLE OF CONTENTS • Company profile in the context of the Polish banking market • 2003 results • Key elements of the program to improve asset quality and manage credit risk • Corporate portfolio • Retail portfolio • Action plan • Key elements of the restructuring process for 2004 • Key retail commercial drivers for 2004

  16. IN ORDER TO CONTROL RISK EFFECTIVELY, SEVERAL ISSUES MUST BE ADDRESSED Legacy issues addressed • Formalistic/procedural approach to credit • High risk concentration with limited number of customers • Ineffective monitoring leading to late detection of problem loans • Consequently, bad debt focused on recovery – not restructuring • Collateral values not realistically marked-to-market • Loan administration shortcomings

  17. ACTION PLAN FOR RISK IMPROVING CREDIT POLICY AND SKILLS IS FOCUSED BOTH ON THE MANAGEMENT OF ‘HEALTHY’ PORTFOLIO AS WELL AS RECOVERY (1/2) Effective • Status ü • Strictly reduced credit delegation levels based on risk/exposure decision grid • Implement new risk classification scoring system • Centralization of credit risk management in 6 regional risk centers segregated from commercial management • Simplified processes for individuals resulting into reduction of throughput times based on full implementation of automated scoring for all retail credit products • Simplified processes for non individuals concentrated in 6 centers • Automated and simplified monitoring process, usage of KBC proven systems • Training on all levels of the credit process • Reduced risk concentration limits strictly adhered to • New collateral policy • More differentiation in coverage ratios • Increased verification of values • Adjusted provisioning policy to consider regulatory rules as minimum as opposed to maximum • Pilot operational, full rollout by mid May 2004 • Early detection of problem loans ü • Improved decision making ü ü • Adjusting key credit policies ü ü

  18. ACTION PLAN FOR RISK IMPROVING CREDIT POLICY AND SKILLS IS FOCUSED BOTH ON THE MANAGEMENT OF ‘HEALTHY’ PORTFOLIO AS WELL AS RECOVERY (2/2) Effective • Status ü • Establishment of autonomous ‘Bad bank’ at HO level with 6 regional centers • Central unit for large exposure recovery • Regionalization of mid-small corporate and retail exposures • New structured processes in retail • Development of NPL planning and reporting tool • Design of approach and system for new NPL management • New credit administration approach • Concentration of credit administration into 10 regional centers • In progress • Pilot running, full rollout September 2004 • In progress • In progress • Pilot running, full rollout from mid May 2004 • Proactive handling of problem loans • Credit administration

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