1. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Optimize Originations for Profit and Success Case Study: Ceska spořitelna Decision Modeling and Optimization Project Petr Kapoun Retail Risk Head Česká spořitelna Zuzana Slouková Head of Risk MIS Česká spořitelna Neel Williams Analytic Consulting FICO

2. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Presenters Petr Kapoun Head of Retail Risk Česká spořitelna Neel Williams Analytic Consulting FICO Zuzana Slouková Head of Risk MIS Česká spořitelna

3. © 2014 Fair Isaac Corporation. Confidential. Results and learnings gained from a Decision Modeling and Optimization project on origination decisions for a Consumer Loan portfolio 3

4. Agenda © 2014 Fair Isaac Corporation. Confidential. ► Project Goals ► Erste Group: Who We Are ► Consumer Loan Optimization ► What Is Decision Modeling and Optimization? ► Ceska Optimization Solution Roadmap ► Initial Project ► Lessons Learned ► Development of Internal Optimization Team ► Further Projects ► Pre-Approved Consumer Loans ► Credit Cards Initial Limit ► Debt Consolidation ► Future Developments 4

5. © 2014 Fair Isaac Corporation. Confidential. ► Improve portfolio level profitability by developing two optimized origination strategies for Consumer Loans portfolio ► New to Bank customer applications ► Existing customer applications ► To maximize portfolio level profitability considering the optimization action space ► Loan amount offered (10 loan amount offers and no offer) ► Loan price (13 loan price offers) ► Total of 131 action combinations ► Operate within portfolio level constraints ► Project delivered by FICO to Česká spořitelna ► Collaborative approach with model development knowledge transfer Project Goals 5

6. © 2014 Fair Isaac Corporation. Confidential. ► ERSTE Group is largest bank group in CEE region ► Česká spořitelna is largest bank in Czech Republic mainly focused on retail banking Erste Group—Who Are We? 6

7. © 2014 Fair Isaac Corporation. Confidential. ► Consumer Loans is second most profitable product ► More sophisticated tuning of credit policy and pricing is required due to more competitive market, higher price sensitivity and saturation of Consumer loans ► To improve portfolio level profitability by optimizing the price and limit for applications Consumer Loans in Česká spořitelna 4.5 4.0 3.0 2.0 1.5 3.5 1.0 2.5 0.5 0.0 Current Year Previous Year Operating income (in bio USD) Prime current account deposits 27% 3.9 22% Consumer Loans 3.3 14% Corporate Loans 2.1 5% Non-priv. curr. Account dep. (D5) 0.8 9% Prime current account deposits 1.4 5% Card Fees 0.8 4% Non-priv. term loans 0.6 % Share on Total Operating Income 7

8. © 2014 Fair Isaac Corporation. Confidential. Application Volumes by Product ► We have main 3 product types eligible for Optimization: ► Standard Consumer Loans ► Pre-approved loans ► Debt Consolidation loans ► All product are offered with different pricing under different brand (majority is ČS) ► Standard Consumer Loans first optimization project Consumer Loans Portfolio 130912071208120912101211121213011302130313041305130613071310131113121401140214031404140514061308 Unsecured Loans: New volume by product (mio CZK) ConsolidationOther StaffStudents MM StandardMM Pre-qualified MA StandardMA Pre-qualified MM Pre-approved Consumer Loans 2 nd option MA Pre-approved Evidence 0 500 1,000 1,500 2,000 2,500 3,000 8

9. © 2014 Fair Isaac Corporation. Confidential. Consumer Loans ► 19% “profit per application” improvement driven by: ► Better price assignment to account for customers’ price sensitivity ► Better limit assignment improved Approval rate without Risk impact ► Better pricing and limit strategy to increase loan amount Results +19,1% Existing Customers Champion 1 st Strategy (Q1 2013) Challenger 4 th Strategy (Q2 2014) Impact Risk adjusted net revenues per application $736 USD$877 USD19.13% Average Loan Amount$4,818 USD$5,192 USD7.75% Average Interest Rate (taken): volume weighted 15.26%15.91%4.26% Approval rate (without impact on Risk costs) 46.40%52.20%12.50% Impact of OPTIMIZATION Principle: Risk adjusted Net revenues per application 9

10. © 2014 Fair Isaac Corporation. Confidential. ► Example: Set aggressive prices to grow while maintaining profitability and control over losses ► Example: Determine the collections treatment that maximizes customer repayment while minimizing attrition or costs What Is Optimization? Optimization Optimization is the mathematical process of finding the best decision for a given business problem Optimization should account for uncertainty and balances competing business objectives 10

11. © 2014 Fair Isaac Corporation. Confidential. Provides Decision Making and Learning Environment Development Methodology Decision Modeling ► Establish mathematical relationships between Actions, Reactions and Profitability Simulation and Optimization ► Identify best strategy scenarios subject to multiple business goals, constraints & forecasts Accelerated Learning Deployment ► Engineer final strategy and deploy challengers as Decision Trees or Rule Sets Inputs ► Customer & Bureau Data ► Segmentations & Scores ► Product Metrics Design Framework Optimization Software (Decision Optimizer) Reporting & Analysis 11

12. © 2014 Fair Isaac Corporation. Confidential. Credit Card Originations Example Decision Model Design Predictive scores Credit Bureau data Credit Bureau scores Price Response Charge-Off Revenue Loss Profit Predictions: Unknown Customer Reactions Which Drive Objective Objectives and Constraints: Primary and Secondary Goals Decisions: Possible Actions Taken Inputs: Known Information Used To Make Decision Customer segments Demographic data Activation Revolving Balances Initial Credit Line Constraints Outcomes: Key Metrics Costs Capital Sales Capital Metrics Action Effect Models 12

13. © 2014 Fair Isaac Corporation. Confidential. Decision Modeling Evaluates Customers’Reactions to Your Actions CustomerActionReaction Line: $10,000 E(Bal) = $1,500 E(loss) = $68 E(profit) = $105 Offer 1 E(Bal) = $1,600 E(loss) = $72 E(profit) = $114 Line: $12,500 Offer 2 Line: $15,000 E(Bal) = $1,650 E(loss) = $79 E(profit) = $113 Offer 3 Risk score = 680 Revenue score = 720 Rev Balance = $12,250 Rev Util = 61% Time in File = 132 Segment = A As Action Effects built into Decision Model it also allows you to run thousands of scenarios very quickly 13

14. © 2014 Fair Isaac Corporation. Confidential. How Better Decisions Yield More Profit Scenario G Increase profitability by $10 per account, without incurring additional losses Current Operating Point Where you are today Scenario B Maintain profitability per account and decrease losses by 6% Projected CHANGE IN LOSS over "Baseline" Projected PROFIT per Account 95 100 105 110 115 120 -5% -10%0%5%10% Efficient Frontier—Increasing Credit Line Trade-off of Profitability Vs. Multiple Business Objectives Efficient Frontier I H G F E D C B J A 14

15. © 2014 Fair Isaac Corporation. Confidential. Core Benefits of Decision Modeling and Optimization ► Power ► Designed to manage complex decision model frameworks ► Scalability to quickly solve very large decision problems ► Efficiency ► Can easily use clients own models, parameters and data elements as inputs ► Can be used across many different decision types— from pre to late collections and recoveries ► Business Insight ► Easily create many different scenarios to compare alternative constraint settings ► Compare new strategies with any existing strategy— swap sets with drill down ► Stress test decisions to understand the impact of an uncertain future ► Support ► Software used by FICO consultants—so provide ongoing best practice support ► Proven and robust development methodology and support ► Proven Results ► Powerful reports for validating decision model and exploring optimization space ► Helps identify weaknesses in existing policy and decisions ► Proven track record of delivering significant business benefits 15

16. © 2014 Fair Isaac Corporation. Confidential. ► Standard Consumer Loans identified as first optimization project ► Planned as a joint project between Risk and Pricing ► Initial staffing ► 2 FTE for risk analytics ► 1 FTE for pricing, ► 1 FTE as support for data/data checks ► FICO ® Decision Optimizer and FICO ® Model Builder installed on desktop ► FICO analytical team completed the optimization strategy development Initial Project Resourcing 16

17. © 2014 Fair Isaac Corporation. Confidential. Standard Consumer Loan Optimization 1.Recommend to have FTEs dedicated to Optimization project 2.Data quality is critical, not only for preparation but also to evaluate and improve the strategy 3.Ability to interpret data is critical, because correlations are usually influenced by existing policy 4.Close co-operation with Business is required ► Sharing of business/marketing strategies, ► Development of new strategy takes approximately 8–10 weeks; basic recalibration takes approximately 2–4weeks 5.‘Champion-Challenger’ testing of new strategies before full rollout on whole portfolio and new approval process for all stakeholders Lessons Learned 17

18. © 2014 Fair Isaac Corporation. Confidential. Internal Optimization Team ► During the development resourcing was changed to: ► Staffing ► 3 FTEs for risk analytics– statistical/economical background with data mining skills ► 1 FTE for pricing did not join the project because of other responsibilities/commitments ► Developed own database for optimization to better understand data quality and to shorten preparation phase for new developments ► Changed installation of FICO ® Decision Optimizer and FICO ® Model Builder from desktop to server, and upgraded server to reduce processing time ► Project delays mainly caused by data quality ► Česká spořitelna analytical team took ownership of the optimization strategy developed by FICO ► Česká spořitelna analytical team begun their own optimized strategy developments, with support from FICO Changes Along the Way “Risk only” team fully dedicated to Optimization with own server/database and reporting 18

19. © 2014 Fair Isaac Corporation. Confidential. Second Project ► Overall principle of initial limit and price optimization same as for Standard Consumer loans ► Same goal: maximal portfolio profit without an increase of risk costs ► Strategy developed by Česká spořitelna Optimization Team, with support from FICO ► Currently there is technical test running (Challenger: Optimized strategy is running on 5% of new production) ► Full roll-out is expected in Q1 2015 Extending to Pre-Approved Consumer loans 19

20. © 2014 Fair Isaac Corporation. Confidential. Third Project ► Strategy developed by Česká spořitelna Optimization Team, with support from FICO ► 7,5% “profit per application” improvement without increase of Risk costs mainly driven by: ► Better identification of potential active card user ► Increase in average limits due to more relevant limit offer for individual client Credit Cards Initial Limit Optimization Existing ClientsChampionChallengerImpact Average Revenues per card (sum of interest and fees) 9.4 USD10.1 USD7.50% Average Max Utilization of Limit38.3%43.3%12.89% Average Daily balance259 USD307 USD18.60% Average Sum of Monthly Outgoing Transactions (POS, Cash) 246 USD248 USD0.62% Impact of OPTIMIZATION Principle: Average Taken limit by risk rating 20

21. © 2014 Fair Isaac Corporation. Confidential. FICO ® Xpress Optimization Suite ► Debt Consolidation has recently become a major product on the unsecured loans market—approximately 51% of new applications ► Goal of Optimization: maximization of portfolio profit of the client without increase of risk costs ► To provide best price and limit offer for all possible combinations of consolidated products for each individual client, according to his risk profile, price sensitivity, loan appetite, attrition rate, future clients value, etc ► Development of such complex Optimization requires more sophisticated solution ► FICO ® Xpress Optimization Suite has been purchased, to provide best possible offer online taking account of exact consolidated products Debt Consolidation 21

22. © 2014 Fair Isaac Corporation. Confidential. ► Current Optimization still has one limitation: giving best possible decision on given request, but not pro-actively searching for all possible options which were not requested ► Adding to standard Consolidation online Optimization can provide answer not only for single request but also calculate possible options to fit customers needs or preference ► Bank still keeps same profit per application in all options. There are more solutions how to resolve customers’ situation, including debt consolidation (if possible) Future Plans Option 1 Standard Response Max. Limit 3ths Price 14% Monthly payment 70 Option 2 Lowest Monthly Installment EXTERNAL Consolidation of: Credit Card 1 000 Overdraft 500 Loan 2 000 INTERNAL Consolidation of: Loan 2 000 NEW LIMIT: 10 500 Monthly payment 150 Price 13,5% Option 3 Best Price EXTERNAL Consolidation of: Credit Card 1 000 Overdraft 500 Loan 2 000 NEW LIMIT: 10 000 Monthly payment 140 Price 11,5% I need 5ths Making more credit decisions in one call Today DO New Xpress New Xpress 22

23. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Questions? 23 Petr Kapoun Retail Risk Head Česká spořitelna Zuzana Slouková Head of Risk MIS Česká spořitelna Neel Williams Analytic Consulting FICO

24. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Thank You! 24 Petr Kapoun Retail Risk Head Česká spořitelna Zuzana Slouková Head of Risk MIS Česká spořitelna Neel Williams Analytic Consulting FICO

25. © 2014 Fair Isaac Corporation. Confidential. Please rate this session online! 25 Petr Kapoun Retail Risk Head Česká spořitelna Zuzana Slouková Head of Risk MIS Česká spořitelna Neel Williams Analytic Consulting FICO