GROWTH POTENTIAL OF SMEs and SME BANKING IN TURKEY. Mehmet Sönmez Yapı Kredi Head of Retail Banking. 15/01/2008, Vienna KOBİ SME.

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1 GROWTH POTENTIAL OF SMEs and SME BANKING IN TURKEY Mehmet Sönmez Yapı Kredi Head of Retail Banking 15/01/2008, Vienna 1 KOBİ = SME SME Banking

2 EVERYDAY IN TURKEY, THERE IS A SIGNIFICANT NUMBER OF PRESS RELEASE ABOUT KOBI AGENDA GENERAL OVERVIEW GROWTH POTENTIAL OF SME BANKING MARKET YAPI KREDİ

3 AGENDA GENERAL OVERVIEW GROWTH POTENTIAL OF SME BANKING MARKET YAPI KREDİ SME DEFINITION IN EU & TURKEY Enterprise category EU definiton Head count Annual Turnover Annual Balance sheet total Turkish definition Head count Annual Turnover Annual Balance sheet total Micro <10 <2 mio EUR < 2 mio EUR < 10 ~600 ths EUR ~600 ths EUR Small <50 <10 mio EUR < 10 mio EUR < 50 ~ 3 mio EUR ~ 3 mio EUR Medium sized <250 < 50 mio EUR < 43 mio EUR < 250 ~15 mio EUR ~ 15 mio EUR

4 SMEs IN THE WORLD AND IN TURKEY Share of SME s in cash loans (%) * UK * USA * Japan * Turkey * Italy * France * Germany SME loans / GDP (Percent) France Germany Italy UK 16,7 18,1 17,0 17, SMEs share in GDP (%) Source: Mckinsey analysis Turkey 9,5 SME s IN TURKISH ECONOMY SMEs SHARE 99 % 77 % 38 % 10 % 22% Nr of SMEs Employment Capital Investment Exports Total Loans *Nr of SMEs are approximately 2 million in Turkey

5 SME S IMPORTANCE IN TURKISH ECONOMY Opportunity of employment with lower investment costs Easier accordance to demand changes and diversities Balance and stability factor in regional development, political and social systems Mitigation of income distribution differences Complementary and supporter of big industry companies SME S MAIN PROBLEMS Lower utilization from altenative finance tools Difficulties to access new technology Lower utility from incentives Difficulties in following up developments in technical and commercial in country and abroad Lack of qualified staff Need to develop competition in global environment

6 THE MAIN PROBLEMS GIVE SOME HINTS ABOUT A WIN WIN APPROACH FOR SME BANKING Marketing / Sales Production Finance Key Points in Banking Relations Unable to predict longterm sales Unable to make market/consumer surveys Lack of domestic demand Problems in delivery channels High costs of raw materials Excess inventory Insuffciency of imported raw materails Collection of receivables on time Problems in credit assurance Interest payments Capital insufficiency Tax problems Problems w/ providing collateral for credit assurance High level of bureaucratic transactions Insufficient credit limits /maturity Time saving Based on relationship banking Uncertainty of future Uncertainty of long-term investment planning Need for financial support Importance of confidence in cash management & credit facilites 3F banking needs (Fast, Flexible, Functional) Source: Askon Survey Reports, team anaysis AGENDA GENERAL OVERVIEW GROWTH POTENTIAL OF SME BANKING MARKET YAPI KREDİ

7 THE CONTRIBUTION OF THE TURKISH SME SECTOR TO THE TOTAL BANKING REVENUES IS EXPECTED TO OUT-GROW THE GLOBAL AVERAGE FOR THE SME SECTOR SME s contribution to banking revenues vs. forecasted growth 30% Average contribution to Banking revenues = 16% Forecasted revenue growth p.a. 25% 20% 15% 10% 5% Turkey Singapore Taiwan Australia US Switzerland UK Japan France Thailand Finland Portugal Austria Germany South Korea New Zealand Sweden Belgium Netherlands Norways Ireland Spain Denmark China Average Growth = 10% Italy 0% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% * Source: Mercer Oliver Wyman analysis SME banking revenues as % of total banking revenues HISTORICALLY, THE POTENTIAL OF THE SME S HAS BEEN OVERLOOKED BY TURKISH BANKS. HOWEVER, THE SME SEGMENT IS FAST CATCHING UP AS THE NEW GROWING PLATFORM Projected Business Lending growth until US$497 BN $Bil Total CAGR 22% US$183 BN Mortgage SME Other Retail Cards Commercial Corporate CAGR 40% 24% 20% 19% 18% 15% * Source: Mercer Oliver Wyman analysis

8 SUBSTANTIAL GROWTH AND VALUE GENERATION IS EXPECTED IN THE TURKISH SMALL BUSINESS SEGMENT IN THE YEARS TO COME, MAINLY DRIVEN BY VOLUMES ESTIMATION Small-business risk-adjusted revenues EUR millions 1,648 CAGR 12.2% 2, Growth mainly driven by volumes Average, before risk cost, margins on customer volumes *, percent 7.9% Loan margin Deposit margin Transaction margin** / / / % Margins are declining but they are expected to stay at healthy level in the medium-term Average risk cost as percentage of loans Pre-tax return on equity in small business banking 2.3% 2.7% 49.6% 40.4% Probability of default % Risk cost increase due to increase of PD due to higher penetration ROE expected to remain high, due to the significant growth in revenues, largely offsetting increase in capital absorbed * Including fees ** On total customer volume Source: National Statistics; UniCredit; McKinsey EACH BANK IN TURKEY HAS FOCUSED ON SME S

9 MAJOR BANKS HAVE STARTED SHIFTING THEIR FOCUS TO THE SME SEGMENT AS A CRITICAL PILLAR OF THEIR FUTURE GROWTH Sme Banking is recently formed as a seperate division in banks Large players are leveraging on existing wide network, but trying to create new areas 2 Key areas in building the pillar Product Variety Relationship and advice Mostly developing sectoral packages which have mostly same mix of products but different name of loans Specialized products include; Seasonal loans, Specialized collateral Custom payment solutions Dedicated Relationship Managers for SMEs Alliances with key organizations Actions giving information for the needs of SMEs (Basel II, technology.. ) AGENDA GENERAL OVERVIEW GROWTH POTENTIAL OF SME BANKING MARKET YAPI KREDİ

10 YAPI KREDI in TERMS OF NUMBERS * Total Assets (billion. billion.) 48.8 Credit (billion) billion) 25 Deposits (billion) billion) 32 Number of Credit Card (million) million) 4,9 Number of Customers (million) million) 14.2 Number of Branches 661 Number of ATM ATM s (1) 1,902 Number of Employees One of the most dynamic and 13,923 Paid Capital (billion) billion) experienced institutions of Turkey 3,143 Fourth biggest private bank for assests * As of September YAPI KREDI HAS %9 BRANCH SHARE with 676 BRANCHES IN TURKEY WE ARE PLANNING TO REACH TO 1,000 BRANCHES AND %11,5 SHARE TILL 2010 Kırklareli 3 Kastamonu 1Sinop 1 Bartın 1 Artvin 2 Ardahan Karabük 1 İstanbul 268 Zonguldak 4 Samsun 5 Rize 1 Kocaeli 3 Düzce 1 Trabzon 3 Amasya 1 Ordu 1 Çankırı 1 Yalova 1 Sakarya 3 Kars 1 Giresun 1Gümüşhane 1 Bolu 2 Çorum 2 Tokat 1 Bayburt 1 Bilecik 1 Iğdır Bursa 24 Erzurum 2 Kırıkkale 1 Ağrı 1 Erzincan 1 Balıkesir 6 Yozgat 1 Ankara 65 Eskişehir 4 Kütahya 1 Sivas 1 Tunceli Kırşehir 1 Muş Bingöl Edirne 4 Tekirdağ 5 Çanakkale 4 Manisa 7 Uşak 2 İzmir 52 Nevşehir 1 Afyon 2 Aydın 6 Isparta 2 Denizli 6 Konya 5 Burdur 1 Muğla 16 Antalya 27 Diyarbakır 5 Niğde 1 Van 1 Malatya 3 Maraş 2 Osmaniye 1 Mersin 9 Hatay 4 Hakkari Şırnak Mardin 2 Antep 5 Siirt Batman 1 Adıyaman 1 Adana 9 Karaman 1 Bitlis Elazığ 3 Kayseri 4 Aksaray 1 Urfa 2

11 YAPI KREDI GROWTH IN SME BANKING KPI Objective: BUSINESS MODEL Total SME lending Bln YTL 2,8 6,2 CAGR: 50% Product offering improvement and SME Revenues % of Total Bank Loans 11% 13% 776 Bln YTL 500 CAGR = 25% bundling Robust and effective proprietary credit risk management tools in order to catch the market risk / return # of SME clients % % of Total Bank Rev 19% Ths CAGR: 17% opportunities Significant improvement of front line coverage, skills, sales force effectiveness OUR KEY SUCCESS FACTORS Dedicated Relationship Managers and Service Model Product offers Innovative Approach Effective Risk Management Wide Network 22

12 OUR SERVICE MODEL Dedicated Relationship Manager 1,100 RMs who know sectors and regions Mixed product knowledge (for commercial and individual needs) Priority in transactions Consultancy Shortening the waiting time of the customer in the branch Fast service OUR PRODUCT OFFER APPROACH IS LEVERAGED ON THE NEEDS OF THE CUSTOMES Turnover Micro Easy & fast transactions Simple saving products Simple credit products Company owner s individual needs Packages Key Credit line (Short Term products loans Overdraft) ST investment products (Mutual funds, time deposits w/ short maturity, O/N) Cheque book Purchasing card POS Debit card Small Business Easy & fast transactions Fast processing of credit app. Flexible credit facility Consultancy Saving products Company owner s individual needs Packages Short Term & Long Term credit line Leasing Mutual funds POS ST time deposits, O/N Purchasing card Debit card Cheque book Insurance Business credit card Medium Sized Ent. Tailor Made transaction and service bundle Fast processing of credit app. Flexible credit facility Saving products Short term and long term loan ( w/ more complexity) Trade products (LG/LC) Investment products FX-fwd-derivates/swaps Bankcards (owner / co / staff) Factoring Leasing Business mortgage Corporate card Source: Team analysis

13 INNOVATIVE APPROACH A unique partnership in Turkish Banking Sector and the world... Banking Services Main Sponsor of Partnership Technology and Internet Services Consultancy for grants and R&D Projects Internet and technological services providing Consultancy for Grants Patent Consultancy 25 INNOVATIVE APPROACH Catalyzer for United Nations and European Union Grants, a unique service in Turkish Banking Sector... Research & Development Projects Agricultural Projects and Equipment Purchasing Invesment Projects For Certain Areas Inform SME having candidate projects.. Consult them for the proper application... Provide project application service... Follow up the project after approval.. Offer Finance alternatives for non-granted part Tailor Made Project Application Service 26

14 INNOVATIVE APPROACH the first SME internet portal of Turkey SME members, an information hub Channel of giving consultancy service Ask the expert Online services Internet, web site name Software and hardware E-commerce services Brand and patent consultancy services 27 INNOVATIVE APPROACH A differentiated SME meeting for Anatolian Meetings in many cities of Turkey... Appealing topic, Grants for SME s Famous Turkish anchorman, Kadir Copdemir Communicative meeting setup 28

15 CHALLENGING EXPECTATIONS ARE JUSTIFIED Approved Grant Program Total Nr of Projects Nr of Projects Delivered Nr of Projects Grant Amount (EUR) Rural and Agricultural Development R & D support Regional SME Development Total *As of 7 Jan 2008 YAPI KREDI MOTTO

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