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SAP MODEL

FINANCE DIVISION - BUSINESS FINANCE

Bf_retail@vpbank.com.vn

JULY 2018

OBJECTIVE

Understanding SAP and related concepts, principles

Knowing how to apply SAP

Having overview of fundamental financial items

FUNDAMENTAL FINANCIAL ITEMS

FINANCIAL ITEMS

FINANCIAL ITEMS

EOP: End of period

ENR: Ending net receivable

16.048 bVND

17.420 bVND

ADB: Average daily balance

ANR: Average net receivable

16.820 bVND

BALANCE SHEET

FINANCIAL ITEMS

PROFIT & LOSS

REVENUE

TOI

Total operation income

NII

Net interest income

NFI

Net fee income

Deposit

VOF – CIE

VOF: Value of fund

CIE: Customer interest expense

Loan = CII – COF + ET+ Broker com

CII: Customer interest income

COF: Cost of fund

ET: Early termination income

Loan

Insurance fee

Deposit

Account fee

Remittance fee

Issuing fee

SMS fee

Debit card fee

Others

Card

Interchange

Annual fee

Late payment fee

Cash advance

Currency conversion

MCBS

Guarantee

SMS banking

Customer rewards

FINANCIAL ITEMS

Lenders are always exposed to the risk that a borrower may default or fall behind in their payment obligations

CREDIT RISK

RISK

FINANCIAL ITEMS

DIRECT COST

Cost from department under Business division

Sale team

Incentive

Marketing

Retail management

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COST

INDIRECT COST

Cost from supporting department

Underwriting & Disbursement (U&D)

After-sale services

Collection

Supporting units (OPS, FIN, HR, IT, Risk, legal…)

PBAC = TOI – Provision – Direct cost

PBAC: Profit before allocated cost

PBT = PBAC – Indirect cost�Profit before tax

PROFIT

WHAT IS SAP?�

Life time of a single account (Single account profitability)

DETAILED OUTPUT EXAMPLE

DETAILED INPUT EXAMPLE

DETAILED INPUT EXAMPLE

DETAILED INPUT EXAMPLE

HOW TO APPLY?

• Build new product / Consider to change product feature
• Build P&L for a product’s campaign
• Build project’s business case
• Evaluate profit from cross sell bundle

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COST STRUCTURE

COST_STRUCTURE IN SAP Step-by-step

ACQUISITION COST

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• OS

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s

I

C

SALE TEAM FIX COSTT

SALE MANEGEMENT

INCENTIVE

MARKETING

PHYSICAL CARD

UNIT COST PROVIDED BY OPS

M

TOTAL OS COST

UW& CPCCA& CREDIT SUPPORT

UW

• Under Writing cost

Occurred before disbursement

Unit cost provided by OPS department

CA

CR support

Loan

• CPC CA cost

Occurred before disbursement

Unit cost provided by OPS department

• CREDIT SUPPORT cost

Occurred before disbursement

Unit cost provided by OPS department

MAINTENANCE COST

`

SU

C

COLLECTION COST

• EARLY COLLECTION
• AMC

SUPPORTING UNIT

• IT     
• OPERATION MGT  

Cost of OPS after eliminating unit cost items

• AFTER-SALES MGT

Branch service, 24/7 ,ATM

• RISK & COMPLIANCE 

RMD, IA, L&C     

• RETAIL SALE SUPPORT & MGT      

RB support, RB managers, Product department

• OTHER SUPPORT UNITS

Other Department : Finance, HR, BICC, Credit, SPM

Total COST

METHODOLOGY PRINCIPLE

FIX RATIO AGREED BY RB MNG

SINGLE ACCOUNT�PROFITABILITY MODEL

LENDING PRODUCTS

METHODOLOGY - JULY 2018

Product Life’s Journey

M

Maintenance

IT, RISK, HR

BIC, FIN

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SAP�Life time of a single account

SAP�Multi-dimension

• Sub-product

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• Channel/
• Sub-channel

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• SAP

​

• Customer Segment/
• Partner

• Branch/ AC in house/ Outsource/ Digital
• 10 Regions/ AP/ CL

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• ETB/ NTB/ Priority
• Thịnh Phát/ VPBS/ Deaura

• Auto: Risk groups/ Car/ Truck
• Home: Risk groups/ Strategy/ Housing/ Project
• BL: Risk groups/ Standard/Revolving
• CL: Risk groups

• UPL: Risk groups/ UBL/ Telco/ X-sell/ Open Market/ Deaura…
• OD: Staff/ Payroll/ Others
• CC: 7 card types
• CA: Payroll/ VP Super/CA
• TD

SAP OUTPUTS

LIFE TIME PROFITABILITY

DETAILED OUTPUT EXAMPLE

REVENUE INPUTS

GENERAL PRINCIPLES

• Identify product revenue indicators and their drivers (revenue inputs)
• Observe revenue inputs based on the most updated & relevant sales performance or portfolio:
• - Ticket size, pricing & flow rates: last 3M
• - Customer behaviors: move-forwarded portfolio by month-on-board
• Calculate income conforming with accounting performance generating flows

LOAN

Early prepayment is observed on population updated quarterly by MOB to reflect closely customer repayment behavior in term of both loan balance & number of account during lifetime.

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MOB is started from disbursement date.

Broker commission rate & Insurance fee are effective rate computed by actual receipts and payout per corresponding disbursement.

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They are usually average of last 3M.

Sensitive factor

RISK INPUTS

GENERAL PRINCIPLES

• Consult with Risk relevant flow rates & recovery rate applied for product/ sub-product/ sub-channel/ partner, usually last 6M risk performance which eliminated seasonal and abnormal fluctuation.
• Apply flow rates into calculating bucket movements from disbursement date until end of life time.
• Compute probability of default & corresponding provision rate to project provision cost.

TERMINOLOGY

ABC

PROVISION RATE

PROVISON FUND @T

= BALANCE @T x PROVISION RATE

PROVISION COST @T

= PROVISION FUND @T – PROVISION FUND @T-1

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GENERAL PRINCIPLES

Flow rates are average of last 3M to 6M consulted by risk, usually not factoring seasoning fluctuation

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It is provided by different channel/sub-products or risk assumption for those not having qualified population.

Working requirement

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Bucket roll rates applied for new product design/ new partners are agreed between Product & Risk team.

Early risk to risk cost

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Currently, retail products are monitored and managed based on SAP model which use annualized lifetime credit loss. To have accurate reflection of quality of new sales, methodology for forecasting lifetime credit loss from early risk is detailed below:

• Lifetime credit loss is estimated from early risk using historical ratio between mature default rate (90+@15MOB) and a given early risk indicator of each retail product.
• Vintages chosen to represent quality of new sales are to be based on when we last change risk policy for a given product / segment and to be no longer than 6 months old.
• Use indicators at later MOB for vintages that have longer MOB.

Forecasted lifetime credit loss of new sales – Illustration

Below is an example of our current lifetime credit loss forecast methodology. Corporate segment of UPL is used for illustration.

• For Corporate segment, quarter 4 vintages are chosen since they are representative of new sales quality as last risk policy change was in October 2017.
• Using historical relationship between early risk and 90+15MOB, we can forecast lifetime credit loss for a young vintage.
• For more mature vintages, we use later MOB indicators as they are better predictors of lifetime credit loss.

APPLICATION

PRODUCT REVIEW/ PROJECTION

DETAILED OUTPUT EXAMPLE

SENSITIVITY TEST

Disclaimer

• SAP is not accounting portfolio performance which driven by various product features, vintage, risk profiles and accounting policy changes…
• SAP provides forward-looking insight and assumptions into how a single product account might behave under specific conditions, helping RB to maintain realistic performance expectations and manage their products more wisely. These forecasts are based on product performance trends, circumstances involving product profiles, clients and other factors. They also involve risks, variables and uncertainties.
• Forecasts and hypothetical examples are subject to uncertainty and the actual performance results may differ from those projected. Past performance is not an indication of future performance as product policy and the bank operation system change frequently.
• Because of time lagging, risk performance of portfolio is applied to predict risk cost in Standard SAP result. In order to reflect closet product policy impact, Risk introduces extrapolation of risk cost from Early risk indicator of 3-month new sales.
• Operational cost is not able to be measured by account, it is therefore allocated to products based on best estimation given transaction volume, unit cost charge & management judgements. It is subjecting to review to ensure a fair allocation.

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DEPENDENCIES

• Population
• Data collection
• Professional context
• Good sample

• New business changes haven’t experienced their performance for long time enough to observe. It is requested much professional judgment/assumption to apply into SAP.

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Eg: flow rates to new product UPL high-income, home decor; new channel OS…

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• Historical data is not available in system or too limited for being sampling population.

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Eg: early prepayment behavior of home loan after 4 years; income by card contract…

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• SAP depends much on the allocation estimation, data quality, product stability

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Eg: Time allocation to RB, sales team time allocation to product, cost accounting, cost sharing to sub-products, overdraft performance…

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SAP MODEL

CREDIT CARD

Product Life’s Journey

I & A

Us

Usage

Retail spend

Cash advance

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Life Cycle’s credit card

• SAP model starts to run by a newly issued card at M0.

• X% of a issued card would be activated and generated automatically annual fee to card holder.
• Y% of activated card get out of life cycle by attrition event.

• Usage volume for each MOB includes retail usage, cash advance and oversea transactions. It’s such a necessary observation that they could help SAP sufficiently capture their income. For ex: cash fee, cash interest, interchange, FX conversion fee.

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Fast issuance

Activation force

Smart usage

Revenue engine

Risk performance

OPEX generation

M1 to M36

M1 to M36

M1 to M36

End Process

Life Cycle’s credit card

• Balance at beginning and closing bill cycle is an offset result b/t usage in bill and payment.
• Z% bill balance (revolving amount) bear interest income
• 100% bill balance use cost of fund
• Fee income is charged in accordance with fee scheme
• Fee deduction includes customer benefits and outsource services payments

• Outstanding balance drives automatically in terms of net flow for each card type => All buckets are fulfill by risk level
• Compute probability of default (PD) & corresponding provision rate to project provision cost.

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• Acquisition cost
• UW & CPC & Credit support cost
• Maintenance cost

End Process

Output example

Fee & charge rates are following product policy

Expenses are based on cost billed or allocated to CC

Customer rewards are all actual rewards payout under product features

Input example

Disclaimer

• SAP is not accounting portfolio performance which driven by various product features, vintage, risk profiles and accounting policy changes…
• SAP provides forward-looking insight and assumptions into how a single product account might behave under specific conditions, helping RB to maintain realistic performance expectations and manage their products more wisely. These forecasts are based on product performance trends, circumstances involving product profiles, clients and other factors. They also involve risks, variables and uncertainties.
• Forecasts and hypothetical examples are subject to uncertainty and the actual performance results may differ from those projected. Past performance is not an indication of future performance as product policy and the bank operation system change frequently.
• Because of time lagging, risk performance of portfolio is applied to predict risk cost in Standard SAP result. In order to reflect closet product policy impact, Risk introduces extrapolation of risk cost from Early risk indicator of 3-month new sales.
• Operational cost is not able to be measured by account, it is therefore allocated to products based on best estimation given transaction volume, unit cost charge & management judgements. It is subjecting to review to ensure a fair allocation.

​

Dependencies

• Population
• Data collection
• Professional context
• Good sample

• New business changes haven’t experienced their performance for long time enough to observe. It is requested much professional judgment/assumption to apply into SAP.

​

Eg: flow rates to new product UPL high-income, home decor; new channel OS…

​

• Historical data is not available in system or too limited for being sampling population.

​

Eg: early prepayment behavior of home loan after 4 years; income by card contract…

​

• SAP depends much on the allocation estimation, data quality, product stability

​

Eg: Time allocation to RB, sales team time allocation to product, cost accounting, cost sharing to sub-products, overdraft performance…

​

SAP MODEL

DEPOSIT CASA

Casa Customer Timeline

B

S

O

A

U

C

C

SELECT CASA PRODUCT

NORMAL CASA/ PAYROLL/ VPSUPPER�

OPENNING CASA ACCOUNT

& DEPOSIT INTO ACCOUNT

USING CASA SERVICE

ACTIVATING AND SPENDING CARD

CUSTOMER REWARD

CLOSED ACCOUNT.

SELECT AND OPEN IDC�MC2/LADY/STEP UP/ PLATTINIUM

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CASA INCOME

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NII

CASA FEE

IDC FEE

COST

CASA PBT

Distribution Code�Lorem ipsum dolor sit amet, consectetur adipiscing

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STANDARD SAP

Put a relevant subtitle in this line

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Card type�4 current IDC card type,

For AF customer, Card type will be default as Platinum

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Timeline

Put a relevant subtitle in this line

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Using casa

Using account service

Customer opened a casa, they may deposit immediately or wait for a time. Ticket size is ADB of a CASA in all life time and it is the corner stoner factor s of PBT

A casa can be closed anytime by customers or product reviewing activity. This phenomenal is reflected via item Attrition rate.

Customer using account service from Vpbank, may get waive fee if they qualified

n

s

e

Opening Casa

20June

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Spending IDC

Offering customer IDC

Spending behavior and product policy bring income from IDC to bank

Vpbank offer customers IDC , Customer can using card, close card immediately , wait to the next annual fee submission

Spending behavior of customer including retail spending, international spending, cash withdraw are the key factors that decide income of IDC and sensitive with product policy

Customer may get waive fee or some special policy will decide FEE income

I

w

q

12 June

12 June

Customer reward

Reward for customer will reduce TOI of product.

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Applied SAP for new product/ campain

Which factors will be impacted ?

STANDARD PRODUCT

COMPARING

ADJUST/ DECIDE

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CUSTOMER PROFIT

PBT

TD

y

9%

4%

16%

20%

PBT

CC

CROSS-SELLING RATIO

PBT

SL

PBT

UPL

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PAYROLL CUSTOMER’S PROFITABILITY

TD

SL

y

USL

CC

USING CC,UPL SAP MODEL FOR PAYROLL CUSTOMER

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SAP MODEL

DEPOSIT TD

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TDTimeline

Contract feature/ Customer behavior

Pricing

Customers may open a TD contract via counter or online channel.

Ticket size and tenor are 2 main important features that decide PBT of a TD contract.

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Customer may decide withdraw money before due date

TD CIE can be change depend on product department when VOF is limited change

n

s

e

Opening TD

20June

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TD- a profitable product :? What is breakeven point of TD

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s

e

Opening TD

20June

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