1. Opening retail banking for mortgage loan products in
emerging markets
Dr. Friedemann Roy
Vancouver, 21 September 2006

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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
NoPFI
PFI
Rollover of unused commitments
5
6
7
Refinancing
window

13. 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?

14. 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