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UCBUCB Approach to New MarketsApproach to New Markets

World Bank Group Housing Finance ConferenceWorld Bank Group Housing Finance Conference

Washington DC March 15-17, 2006Washington DC March 15-17, 2006

Jean-Christophe Steven

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ContentsContents

• UCB PresentationUCB Presentation

• Building new marketsBuilding new markets

• Today’s new (emerging) markets…Today’s new (emerging) markets…

• … … An opportunity for UCBAn opportunity for UCB

• Two case studies: Turkey and MoroccoTwo case studies: Turkey and Morocco

• Challenges UCB facesChallenges UCB faces

• ConclusionsConclusions

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1. UCB Presentation1. UCB Presentation

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A Housing Finance SpecialistA Housing Finance Specialist

• Founded in the 1951Founded in the 1951 post-WW2 France under post-WW2 France under reconstruction…reconstruction…

• ……to help the process by financingto help the process by financing main, main, secondary or investment residences, UCB is a…secondary or investment residences, UCB is a…

• ……wholly-owned subsidiary of the BNP Paribas wholly-owned subsidiary of the BNP Paribas Group Group and the Housing Finance business line and the Housing Finance business line flagship of BNP Paribas International Retail flagship of BNP Paribas International Retail Financial ServicesFinancial Services

• UCB markets its products B2B through a network UCB markets its products B2B through a network of business referral partners of business referral partners (e.g. Brokers, Realtors, (e.g. Brokers, Realtors, Construction Companies and Property Developers)Construction Companies and Property Developers)

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International developmentInternational development

• UCB is UCB is the only French Housing Finance the only French Housing Finance specialist with an international networkspecialist with an international network, incepted , incepted in 1986..in 1986... .

• ……and presently comprising 8 unitsand presently comprising 8 units in France, in France, Spain, Italy, Portugal, Greece, Norway, the Spain, Italy, Portugal, Greece, Norway, the Netherlands and BelgiumNetherlands and Belgium

• We open UCB Switzerland in June 06 and 5 other We open UCB Switzerland in June 06 and 5 other projects are taking us, projects are taking us, inter aliainter alia, to Turkey and , to Turkey and Morocco .Morocco .

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Global Data BankGlobal Data Bank

• 55,000 new customers per year55,000 new customers per year

• Euro 10.8 Bn new loans in 2005 Euro 10.8 Bn new loans in 2005 (+34.1% over 04)(+34.1% over 04)

• As at Dec 2005, Euro 27.8 Bn loans As at Dec 2005, Euro 27.8 Bn loans outstanding (+23.6% over 04)outstanding (+23.6% over 04)

• 2 500 employees2 500 employees

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2. Building new markets2. Building new markets

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3 Development Phases3 Development Phases

• 1951: France as a country under reconstruction1951: France as a country under reconstruction– French State sponsored market organisationFrench State sponsored market organisation– Dominant State-owned players Dominant State-owned players – Subsequent gradual liberalizationSubsequent gradual liberalization

• 1989: France as a fully liberalized country in an integrating 1989: France as a fully liberalized country in an integrating Europe.Europe.– UCB internationalizes itself, with low growth at homeUCB internationalizes itself, with low growth at home– 1989: preparation for first subsidiary in Spain…1989: preparation for first subsidiary in Spain…– ……followed by Italy (1989), Portugal (1999), etc, etc. followed by Italy (1989), Portugal (1999), etc, etc.

• 2002: France in the Global Economy 2002: France in the Global Economy – Core European network consolidation (The Netherlands, Core European network consolidation (The Netherlands,

Norway, Greece, Belgium, Switzerland and Germany)Norway, Greece, Belgium, Switzerland and Germany)– … … with assessment of emerging markets in Eastern Europe with assessment of emerging markets in Eastern Europe

and the South Med.and the South Med.

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Methodology of Methodology of expansionexpansion

• No preset roll-out model:No preset roll-out model:– Draw on past experiences to adapt to new placesDraw on past experiences to adapt to new places– Strongly support new businessesStrongly support new businesses– Operational autonomy of mature subsidiaries Operational autonomy of mature subsidiaries – Cross-fertilisation between UCB businesses wherever Cross-fertilisation between UCB businesses wherever

beneficial (IT, marketing, process) beneficial (IT, marketing, process) – Leverage on BNP Paribas Group international presenceLeverage on BNP Paribas Group international presence

• Models toolkit:Models toolkit:– Northern Europe Model (Brokers referrals)Northern Europe Model (Brokers referrals)– Southern Europe Model (Realtors referrals)Southern Europe Model (Realtors referrals)– Post-war France Model (Construction Companies referral)Post-war France Model (Construction Companies referral)

• Achieve a realistic and sustainable local market shareAchieve a realistic and sustainable local market share depending on market dynamics (Do not overreach)depending on market dynamics (Do not overreach)

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New markets features (1)New markets features (1)

• Macroeconomic Imbalances…Macroeconomic Imbalances…– Currency volatility challenges foreign investorsCurrency volatility challenges foreign investors– High Interest ratesHigh Interest rates– Limited primary liquidity and almost no secondaryLimited primary liquidity and almost no secondary– Significant budget deficit ratiosSignificant budget deficit ratios

… … require Multilateral Financial Institutions to require Multilateral Financial Institutions to assist in addressing the situation with assist in addressing the situation with suggestions for:suggestions for:

– More flexible exchange rate regimesMore flexible exchange rate regimes– New practices in financial marketsNew practices in financial markets– New frameworks, laws and regulationsNew frameworks, laws and regulations– Monetary policies and inflation targetingMonetary policies and inflation targeting

• … …and to look for the contribution of Housing and to look for the contribution of Housing Finance specialists Finance specialists

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New markets features (2)New markets features (2)• Socioeconomic Imbalances such asSocioeconomic Imbalances such as

– Dwellings deficits Dwellings deficits • Qualitative in Eastern EuropeQualitative in Eastern Europe• Quantitative and Qualitative in the South Med RimQuantitative and Qualitative in the South Med Rim

– Housing Loans LimitationsHousing Loans Limitations• Housing Loans with shorter term Housing Loans with shorter term • Limited Loan Products rangeLimited Loan Products range• Low mortgage debt ratio: between 1% and 15% (1% in Low mortgage debt ratio: between 1% and 15% (1% in

Turkey, 4% in Poland, 8% in Morocco, 11% in Jordan, Turkey, 4% in Poland, 8% in Morocco, 11% in Jordan, 12% in China)12% in China)

• Strong demographic growth and a very young Strong demographic growth and a very young populationpopulation– Fast paced and recent Fast paced and recent urbanizationurbanization, at the expense of , at the expense of

space control (Currently 40% of less developed countries space control (Currently 40% of less developed countries residents live in urban areas. It is expected that 60% of the residents live in urban areas. It is expected that 60% of the world population will be urban by 2030, and that most world population will be urban by 2030, and that most urban growth will occur in less developed countries.urban growth will occur in less developed countries.))

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3. 3. Today’s new (emerging) Today’s new (emerging) markets…markets…

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UCB Three Criteria Model (1)UCB Three Criteria Model (1)We regularly run a model blending about 200 indicators to track:We regularly run a model blending about 200 indicators to track:

• AttractivenessAttractiveness, with respect to: , with respect to: – size size – profitability profitability – growth growth

• AccessibilityAccessibility in terms of: in terms of:– refinancing refinancing – costs of starting up costs of starting up – synergies with the BNP Paribas Group synergies with the BNP Paribas Group – competitive environment competitive environment – specificities of the countryspecificities of the country

• RisksRisks, the cornerstone assessment of :, the cornerstone assessment of :– regulatory risk regulatory risk – solvency risksolvency risk– market risk market risk – country riskcountry risk

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UCB Three Criteria Model (2)UCB Three Criteria Model (2)

• In-depth Reviews and Country Committees ensue …In-depth Reviews and Country Committees ensue …

• ……To sort countries, as per today’s data, according to To sort countries, as per today’s data, according to 4 4 categoriescategories: : – Priority countries Priority countries – Accessible countriesAccessible countries– Attractive countriesAttractive countries– Country to further assessCountry to further assess

• Dynamic forecastsDynamic forecasts are also run to envisage future trends: are also run to envisage future trends:– And this process can change countries statusAnd this process can change countries status

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UCB Three Criteria Model (3)UCB Three Criteria Model (3)

• Our housing finance model is overall providing positive Our housing finance model is overall providing positive views for emerging markets. Worth of note:views for emerging markets. Worth of note:

• HungaryHungary: : – A slowing down of the loans growth, albeit at a high A slowing down of the loans growth, albeit at a high

level (30 % a year vs 80 % over 2000-2004 period)level (30 % a year vs 80 % over 2000-2004 period)– Stable margins at high levelStable margins at high level– Development of refinancing by mortgage bonds Development of refinancing by mortgage bonds

(mainly covered bonds)(mainly covered bonds)

• Russia:Russia:– Very strong loans growth (about 85 % a year Very strong loans growth (about 85 % a year

between 2000 and 2004)…between 2000 and 2004)…– ……supported by the Government that should supported by the Government that should

implement in 2006 a support package for our industryimplement in 2006 a support package for our industry

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UCB Three Criteria Model (4)UCB Three Criteria Model (4)

• Algeria Algeria – A relatively small market compared to its neighbours A relatively small market compared to its neighbours

(Morocco, Egypt, Tunisia) but a very important potential. (Morocco, Egypt, Tunisia) but a very important potential.

– Improvement of market conditionsImprovement of market conditions: new banking law : new banking law (2005), computerization of land registries, (2005), computerization of land registries, mortgage mortgage finance trainings for the main market players.finance trainings for the main market players.

• IndiaIndia– Growth of outstanding loans remains at a high level (40 Growth of outstanding loans remains at a high level (40

% a year between 2000 and 2004, outstanding as at % a year between 2000 and 2004, outstanding as at 2004 : US$ 26 Bn)2004 : US$ 26 Bn)

– A favourable legal environmentA favourable legal environment– Decrease in interest rates (from 15% in 1999 to 9% in Decrease in interest rates (from 15% in 1999 to 9% in

2005)2005)

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4. An opportunity for UCB4. An opportunity for UCB

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Why we have to be there?Why we have to be there?

• Important structural reformsImportant structural reforms happen now in many happen now in many emerging markets:emerging markets:– We can provide to local regulators our views on practical We can provide to local regulators our views on practical

solutions for issues encountered in many different countriessolutions for issues encountered in many different countries

• We want to share with local partners We want to share with local partners best practices and best practices and skillsskills– Win-win strategy locallyWin-win strategy locally

– Gradual integration strategy globally Gradual integration strategy globally

• Also, risks being higher we can enjoy:Also, risks being higher we can enjoy:– Higher margins and…Higher margins and…

– Synergies with the International Retail Banking and Financial Synergies with the International Retail Banking and Financial Services core business lines of BNP ParibasServices core business lines of BNP Paribas

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Optimism about the futureOptimism about the future

• Given its linkages to land, construction, and labour Given its linkages to land, construction, and labour markets, markets, housing finance is key to economic growthhousing finance is key to economic growth and at the forefront of Governmental Policies and and at the forefront of Governmental Policies and Planning everywhere. Planning everywhere.

• Mortgage markets have grown at very strong annual Mortgage markets have grown at very strong annual rates and rates and construction activity is boomingconstruction activity is booming with no signs with no signs of crash landingof crash landing

• Emerging countries offer Emerging countries offer significant opportunitiessignificant opportunities for for the following reasons:the following reasons:– Falling interest rates, tax incentives and healthy property prices Falling interest rates, tax incentives and healthy property prices

have increased the affordability of housing loans and the desire have increased the affordability of housing loans and the desire to be part of the virtuous circle. to be part of the virtuous circle.

– Increasing incomes will lead to increased demand for housing Increasing incomes will lead to increased demand for housing finance in urban areas. finance in urban areas.

– Rapid economic growth has led to urbanisation causing the Rapid economic growth has led to urbanisation causing the demand for housing to soar. demand for housing to soar.

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How to enter these markets?How to enter these markets?

• Carefully review conclusions of our internal Three Carefully review conclusions of our internal Three Criteria Model : Criteria Model : TurkeyTurkey and and MoroccoMorocco stood out as stood out as desirable countries.desirable countries.

• Respond to BNP Paribas local partners’ requests Respond to BNP Paribas local partners’ requests for UCB presence, for UCB presence, TEBTEB in Turkey and in Turkey and BMCIBMCI in in Morocco, to provide our intermediaries marketing Morocco, to provide our intermediaries marketing expertise. expertise.

• Take strategic decisions about what categories of Take strategic decisions about what categories of intermediaries to market.intermediaries to market.

• Meet representatives of the chosen target Meet representatives of the chosen target intermediaries in all key citiesintermediaries in all key cities

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Turkey (1)Turkey (1)

• A young and dynamic population of over 70 A young and dynamic population of over 70 million, 65% less than 30 years oldmillion, 65% less than 30 years old

• A fast developing country with an average A fast developing country with an average growth rate of 7.5% per year in 2002-2004growth rate of 7.5% per year in 2002-2004

• A macroeconomic stabilization with a virtuous A macroeconomic stabilization with a virtuous circle of:circle of:– Lowering inflation expectation (7,9% in 2005)Lowering inflation expectation (7,9% in 2005)– AAnd falling real interest rates (≈ 14%)nd falling real interest rates (≈ 14%)

• Many Banks push into mortgage financeMany Banks push into mortgage finance

• Most middle and low income families cannot Most middle and low income families cannot benefit from housing loans because they are benefit from housing loans because they are still too costlystill too costly

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Turkey (2)Turkey (2)

• The developing strategic shareholding pact with The developing strategic shareholding pact with TEB provides UCB with a gateway into one of the TEB provides UCB with a gateway into one of the largest countries in Europe population-wise…largest countries in Europe population-wise…

• … … at a time when Turkey has just embarked in a at a time when Turkey has just embarked in a convergence scenarioconvergence scenario with the EU supported by with the EU supported by strong performance in terms of growth, inflation strong performance in terms of growth, inflation and interest rates.and interest rates.

• Moreover a new « Housing Finance System » law Moreover a new « Housing Finance System » law will, within months, will, within months, accelerate the expansion of a accelerate the expansion of a mortgage financing market currently taking off mortgage financing market currently taking off brisklybriskly..

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Morocco (1)Morocco (1)• Macroeconomic stabilityMacroeconomic stability with with

– Low inflation: average 1,5% for the period 1999-2004Low inflation: average 1,5% for the period 1999-2004

– The external current account has been in surplus since 2001 The external current account has been in surplus since 2001

– Growth: 5,5% in 2003 and 4,2% in 2004Growth: 5,5% in 2003 and 4,2% in 2004

• Important lack of housing unitsImportant lack of housing units

– In 2005, the deficit is stable at 1 240 000 dwellingsIn 2005, the deficit is stable at 1 240 000 dwellings

– Underdeveloped Realtors sectorUnderdeveloped Realtors sector

• A dynamic housing loans sectorA dynamic housing loans sector

– Decrease in interest ratesDecrease in interest rates (from 12,5% to 7,5%) (from 12,5% to 7,5%)

– Housing loans outstanding reached 8% of GDP in 2004 Housing loans outstanding reached 8% of GDP in 2004 against 3% in 1995against 3% in 1995

– With a 25% growth in outstanding in 2005 (5,4 Bn euros), the With a 25% growth in outstanding in 2005 (5,4 Bn euros), the market is already in a booming trend. But the market is already in a booming trend. But the potential of potential of development remains importantdevelopment remains important, since only 20% of the , since only 20% of the population is holding a bank account. population is holding a bank account.

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Morocco (2)Morocco (2)

• UCB approaches Morocco as UCB approaches Morocco as a springboard for the a springboard for the MaghrebMaghreb, a region comparable to Turkey , a region comparable to Turkey population-wise.population-wise.

• Due to its Due to its economic stabilityeconomic stability (controlled inflation, (controlled inflation, low interest rates) and its tight links with Europe…low interest rates) and its tight links with Europe…

• … … Morocco is a neighbour country with Morocco is a neighbour country with good good mortgage finance potentialmortgage finance potential……

• ……through a construction companies/ developers through a construction companies/ developers referrals marketing strategy. referrals marketing strategy.

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Difficulties in emerging countries: Difficulties in emerging countries: challenges UCB has to face (1)challenges UCB has to face (1)

• Underdeveloped financial systemsUnderdeveloped financial systems– Lack of long term debts instruments and other funding Lack of long term debts instruments and other funding

issues issues – Securitization of mortgages proves difficultSecuritization of mortgages proves difficult

• A still unstable legal environmentA still unstable legal environment– Land tenure, property rights and the legal process can Land tenure, property rights and the legal process can

be significant impedimentsbe significant impediments

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Difficulties in emerging countries: Difficulties in emerging countries: challenges UCB has to face (2)challenges UCB has to face (2)

• A limited access to housing financeA limited access to housing finance– Inadequate supply of trained professionals Inadequate supply of trained professionals – New products framework difficulties (PEL in Morocco)New products framework difficulties (PEL in Morocco)– Maturity of loans is often too shortMaturity of loans is often too short– Lack of sound information on the actual exposure of Lack of sound information on the actual exposure of

individuals to debt individuals to debt

• Crisis triggers and early warning indicatorsCrisis triggers and early warning indicators– Economic crisis: unemployment, lower housing values, Economic crisis: unemployment, lower housing values,

external shockexternal shock– Delays in coming up with new prudential lending standards Delays in coming up with new prudential lending standards

and regulationsand regulations– Ineffective foreclosure (delays, appeals, adverse judiciary)Ineffective foreclosure (delays, appeals, adverse judiciary)– Late payment and default statisticsLate payment and default statistics

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ConclusionsConclusions

• The current period appears to be a historic high point in the The current period appears to be a historic high point in the Housing Finance industry historyHousing Finance industry history

• UCB and its parent, BNP Paribas, recognize the many UCB and its parent, BNP Paribas, recognize the many opportunities offered by these conditions and…opportunities offered by these conditions and…

• ……will make increasingly available its expertise and financial will make increasingly available its expertise and financial capacity to our industry….capacity to our industry….

• ……especially in the Emerging Markets.especially in the Emerging Markets.

Thank You For You AttentionThank You For You Attention