Reviving a rural bank

Rizal Philippines
July 28, 2016

I tried doing a bp myself. I am doing this for a rural bank which was just acquired and I was asked for advice on how to turn this around.  The BSP requires a BP too:

I started getting the inputs Monday, I attended their informal meeting yesterday. I started working on this this morning and was done by 12:30

3 days from input to output of a draft   5 hours to draft  What am trying to say:   You can do it YOU CAN SUBMIT THE DRAFT

I  Background:

The San Francisco bank  was recently acquired from its former owners recently, (March)   It was established on December 11, 1959 as the 235th rural bank to serve then the growing QC area area.  It has because of its managementand owners  kept up with the times.  It stopped lending for a time, has only about 1.300 depositors

It has been acquired by CBC group headed by dynamic business woman CBC who is engaged in construction, real estate, luxury goods trading and lending investor.

Its management team and Board of Directors:  include:

1.  Mr. AG   President and Director former head of a chemical petrochem plant, and now heads the first solar manufacturing plant in the PHL

2.   Mr EV  - VP and Director, formerly from from two large commercial bank

3,  Mr. EMR -  Manager of Operations, formerly cluster head and Senior Manager at a Universal Bank

Its financial is as follows (as of June 30, 2016)  

  Total Assets:   101,071549

   Total Loan Portfolio  net                 54, 630,154

Total Deposit                                     67,601,975

Total Stockholders Equity                31,447,315

PNL for the first 6 months of 2016

Income                                               4,788,013

Expenses                                          5,072,846

 Income/Loss                                        264,883

II  Opportunity Scanning:

Macro:

1.   Increasing Philippine Population 

     This will be the driver for increased consumption (salary loan) and other businesses

2.  Political  (more peace and order)

    The new President is intent on crushing drugs and criminality, and corruption.  The peace and order will usher in more investments and business activity.

    The govt wants to lift the poor from poverty (we can not legislate that you get out of poverty.  You have to work yourself  - Duterte)

3.  Social

    The poorest of the poor about 70% of the population, the CDE segment are short of cash.  They get financing from Bombay, and pawnshops where they get 2 to 4% rate per month on the average.

   This segment of population need micro insurance, microfinance and other services.

    Consumerism is on the rise and even the poor want to have aspirational products and gadget

4.  Environmental  (business)

    1.  Many banks have closed  due to various financial crisis further upping the demand for financial services

    2.  Most U Banks and Kbanks are serving the upper and middle market and neglecting the lower market.   They have neglected and left out the small lower market being not cost effective.

(We cant quantify these yet)

III.  Business concept and model

      Concept    Banking (not just rural banking)  Serving financial needs of many people with courtesy speed  and concern

      Jobs:      remittance, cash safekeeping, income, stability, fast service,  courtesy, accessibility, convenience

      Pains:    service fee, long queues, discourteous staff, policy banking,

     Gains:   courteous and fast service, income, security, stability, new products

      Model  

Ptm       -   middle and lower market

Link      -  personal through private bankers,  text, emails, and social media, website, portal

Bond    -   crm and personalized service by private bankers and staff

Key Process  -  loan processing, deposit,  private banking, services:   

                              bayad center,  micro insurance, bank assurance

Key resources:    computer software for :

                             bank transactions, website for private banking,                                  bank office,.

                             liquidity

'                            bank staff:

                             lending and collection

                             treasury

                             risk management

                             asset and liability management

Partners:         condominium owners

                        high value friends of CBC

                        Cross over technology (solar power manufacturer)

                         developers and businessmen
                         Western Union  Bayad Center, commercial banks
                         SSS, HDMF, BSP DBP (for loan origination)
                         ATM backbone (Megalink)

   MVP       quick and hassle free competitive lending

                   value and security for your money

Financial:

         Revenues   -       12%

        Cost of money      2%

        Spread                10%

      Revenues:   Fee based:   1/2 of 1% to Max of 5%

Positioning:   San Francisco Bank  (as a  bank)

Geographical coverage :    MM and NCR

Strengths:           Solid financial condition

                         Location -   MM

                        Connections of the owner and BOD

                       

   Weakness:     x corporate officers top management

                       lack of deep talents for banking;  sparse staff for real banking

                      mixed interest of the owner (can be source of lack of focus)

                      unknown to many to the banking public

                      limited market at the moment

IV Business Objectives:

Vision:    We envision the economic upliftment of the entire San Francisco del Monte by providing financial aid to its small businessmen and small industrialists. < could be MM or NCR>

Mission:  

1.  We behold our leadership in nation building by encouraging and promoting entrepreneurial leadership with its expanding and extensive products and services in order to effectively address our clients' needs.  Our commitment is excellent service to the people we prioritize -  our patrons, our shareholders and whole community

2.  Dedicating  service to the new entrepreneurs by providing them a highly accessible financing window.  We believe in:

      1. Encouraging nationwide agricultural, industrial, and commercial development though organization of cooperatives and associations aof marketing of their products to assure the viability of their continuous operations

     2,  Providing funds to entrepreneurs and other types of businesses to avoid their being victimized by high cost of usurious sources of capital

     3.  Maintaining a friendly relationship between the bank and its client by immediate attendance to their needs.

The rural bank is a child of RA 720 Rural Banking Act 

Business objectives:

Objectives and Key Result Areas

  Year         Equity      Liability        Total Asset    Loans

   1.            30M  + 20         150      200                110                      

   2             70                      250     320                 188                     

   3            100                     350     450                 262                        

   4            120                     500      620                375                         

    5            150                    850     1,000              637                        

     V Organization

  Middle Manager   -    Ely M. Rulona for bank operations, cash, deposit and                                             lending operations    

                                     Romulo Damian  Chief Compliance Officer

                                     Fernando A. Franes Loan Officer

Financial                      Elmer Villegas expert in treasury operations

                                     Rate setting fund management

Technology               IT Casa software

                                ATM

                                Auto Loan

                                Bank automation

                                Bank assurance

                               Lending and collection

                               Bayad Center

                               Housing loan origination housing loan

                               Consumer loan     

                               Branch opening and operations

VI    Products:

      Traditional:

      Agri Industrial Loans

     Consumer Loans

     Real Estate Loans

     How offered?

    Comparison with other banks processing time, fees, requirements

     New products:

    1.  Condo loans take out

    2.  Micro finance

    3.  Micro insurance

    4.  Loan Origination (DBP, Land bank, SSS)

    5. Pag ibig loan origination

    6. Solar financing

    7. Remittances (the bank earns on FX differential and share on remittance fee. Team up with WU)

VI  Micro market:

1.  A  number of employers have inquired about salary loans so with teachers for loan products

2.  Ms. Lao owner of Antel condo charges 2% per month on in house condo financing.  This could be matched with private banking  project of CBC.  SFDM can  take out for a fee, 12% plus  3 to 5% discount. for loan products

3.  A number of high value individuals, retired are going for a CTD provided they receive regular payments of interest on LOI

4.  Many market vendors are suffering from Bombay.   Digong Duterte hopes to end usurious practice of Bombay but it will not end if nobody takes the cue.

5.  No banks KB UB are turning away low end clients:  both loans and deposit.

     High opening account level and high adb and penalties

Sales estimate:

    Say QC:   

    1.  Current # of depositors    -   1,300

    2.  Current number of borrowers  - 71

    Macro estimate:

3.085  million

The market served by SFDM RBI is less than 0.01%

There is a large room for growth - 99.99% of total population   The former owners may be just waiting for customers to come -- were complacent or could not care less

VIII  Enterprise delivery System  (Strategy)

  A.   Objective.Outcome :    

1.  Financial   To be a P1 billion bank in 5 years time:   P150 million in equity and 

P850  million

      To earn  P35 million a year at the end of 5 years, 

      ROE of  20% 

2. Customer: 

    Fast and friendly

    Tops in CRM

    Tops in LOI CTD packages

3.  Products and market

    1.  Serving salary loan needs of employees of _________________

    2.  Tops in condominium take out financing

    3.  In auto loans

    4.  Leader in Private banking, LOI of retirees

B.  Matching Marketing

      Product   -   Perfect the following products in the order of priority:

            as with regards to inputs, processes, outputs and system

Portfolio allocation:


Revenues:

First five years eventually shifting to 70 30 in 10 years time

     Asset based:          90%

     Fee based              10%

Asset based allocation:

Risk assets:

     Agri loans                                      15%

     Re estate:  housing and condo      30%

     Consumer loans  (salary loans)     10%

      Commercial industrial                    30%

      Solar                                               10%

      Other (clean/discounting line)          5%

Timeline on launch of products/intro

     Year                 Asset product                      Fee services

       1           salary loan, condo loan        Bayad center, Western
                                                                   Union remittances

       2.          solar financing credit lines    micro insurance, HDMF 
                      auto loan                              housing loan
       3.                                                         loan origination, HDMF

       4.         pawnshops                             bank assurance

       5.        credit card tie up                    bank assurance, stocks                          

                                                              

    Promotions:

          1.Social media:   FB blog

          2.  Establish a portal a link to private bankers in addition to   kiosk and branches

          3.  Events:  cocktails and  merienda cena periodically with high value clients

         4.  Gift giving :  gadgets,  power banks etc upon opening of accounts

         5.  Targets and incentives to HO staff and directors

         

  Placements  (Channels)

              

        1.  Private banker sellers/branch managers for deposits

        2.   Incentives for the company of employees for salary loan

        3.  Connection of  CBC for condo take outs

Pricing

     Middle of the market pricing for loans and  deposit product:  not the lowest, and not the highest.  Very competitive..

     Compete on:

     1.  Fast and efficient processing release  Beat Digong 3 days

     2.  Minimum fuss and requirement

C. Processes:

     List down the processes

             Chart of Accounts
             Loan Policies
             Personnel Policies
             Operating policies

                      Cash
                      Forex
                      AMLA

     Manpower requirements

     Job Descriptions

     Quality/Dual Control/ Compliance

               CB rules

               Reports

               AMLA

D Inputs

        Manpower

        Money

        Machinery computers/portal/ software  (an opportunity)

                e banking
                phone banking
                portal for private banking (for inquiries new accounts,                        balances interest etc)

IX Financials

    Income Statement

   Cash flow

    Balance Sheet

   (60 months)  An actuarial estimate has to be made how slowly the income, the loan releases are made.

    Assumption

    20 to 30% liquidity

     spread is 10%

     the fixed cost would grow with the company's growth say  5% per annum

     refer to cost build up for private banking

Assumptions:

1.  Launch of products:

Year                 Asset product                      Fee services

       1           salary loan, condo loan        Bayad center, Western

                                                                   Union remittances

       2.          solar financing credit lines    micro insurance, HDMF 

                      auto loan                              housing loan

      

       3.           e banking                             loan origination, HDMF

       4.         pawnshops                             bank assurance

       5.    phone banking                            bank assurance, stocks                          

2.  Size of portfolio;

 Agri loans                                      15%

     Re estate:  housing and condo      30%

     Consumer loans  (salary loans)     10%

      Commercial industrial                    30%

      Solar                                               10%

      Other (clean/discounting line)          5%

3.  Salaries and staff requirements:

   1.  Private bankers  BM  -  P30,000 to P50,000 a month

   2.  Loan Officers                  20,000 to 25,000

   3.  Regular staff                 P15,000 

   A private banker is in charge of P50,000,000 new deposits per year

   A loan officer and an assistant is in charge of P100,000,000 million a year

  A new service needs one regular staff a year say  micro insurance, Bayad Center

  Estimated volume:

   1.  Micro insurance   5 million first year 10, 15, 20, 25; com is 30%

   2.  WU  fx volume of  P10, 15, 20, 25, 30,  fx margin of  2.00 per dollar, and remittance fee com of 2%

   3.  Bayad center:    credit card, 

Notes on private banking:

     1.   A private banking group is established to solicit funds from high value retiring individuals who are on LOI, usually buying CTD at rates of 3 to 6% with monthly interest payments

    2.  A private banker staff gets P30,000 to P50,000 per month depending on his/her quota.  He or she shall bring in a minimum of P4.2 million  a month +   1/4 of 1% in excess of ADB for the quarter (per annum)

      Cost of  oh/placement:

     360,000 /P50,000,000 x  2 (average because of the build up

     0.75 x 2 =  1.5%  + 0.25% incentive =  1.75% marketing                   expense

   3.  Cost of funds:

        Say average of 4.00  + 1.75   =   5.75/.85 liquidity requirements                                        6.76

                                                       +   10 spread

   4.  Lending rate                            17% +  to be matched with 

                                                         condo and auto loans

         Condo loans:

         Structure:      3 to 5%  discount

         Interest          10 to 12% straight financing  (Effective rate is 

                                20 to 24%  + 3 to 5 making yield to be between                                  23 to 27%

5.  Matching and timing

      The loan releases is matched with the ability of Private Bankers to generate funds.  So that there is no loss or negative carry.   The loan officers and PB staff are added as the the growth of funds and number of users of fund increases.

                               

X  Compliance with regulations:

    CB regulations

     Reports

      AMLA

         There are a compliance officer, internal audit who assure compliance.  The board also supervises

         There are regular audit from SES

XI Exit provisions