SAS^® moves Croatia's leading bank closer to Basel II

Zagrebačka banka: Risk management and more in the 'new Europe'

Part of the Milan-based UniCredit Group, Zagrebačka banka (ZaBa) is Croatia's largest bank in both market share and assets (57.5 billion Croatian kuna, or approximately US$9.4 billion). A full-service bank with 186 branches and more than 4,000 employees, ZaBa provides loans to retail and corporate clients together with savings, investments, pension funds and transactional services.

Zaba has a highly developed infrastructure and clear market leadership in key areas, according to Sandra Bilandzic, Director, Risk Architecture Management Department. In 2002 ZaBa joined the UniCredit Group, one of Europe's most successful financial institutions. "Investing in 'new Europe' is part of UniCredit's long-term strategy," says Bilandzic. The acquisition meant increased impetus within ZaBa to enhance internal processes and address regulatory requirements. SAS was perceived as an essential element in enabling this change.

"Over the last decade we've embraced various opportunities for using SAS," says Bilandzic. These range from data capture and cleansing to data marts, model development and testing simulations, "what if?" analyses and all types of reporting. "SAS solutions have helped improve our ongoing business. Other Croatian banks are not nearly as advanced as we are in areas such as data quality or modelling." ZaBa has seen long-term benefits in all areas from the product level to client service, audits and more. "This has helped move us far closer to all three pillars of Basel II. Our use of SAS has shown that continuous, structured improvements can reduce the impact of big changes on a business like ours. And SAS has saved us a lot of time and effort – it's certainly made my professional life much easier."

Risk management and reporting
Risk is a key focus, and SAS supports ZaBa in four main ways. First, SAS collects and reviews data from multiple systems and builds new risk applications. Second, ZaBa develops risk models in SAS: "We want to create targeted models to increase efficiency and improve customer satisfaction in areas such as new product development and credit scoring," says Bilandzic. "We also use SAS in provisioning models and budgeting to drive down costs and enable better portfolio management." Third, SAS analytics provide "crucial support for major business decisions in terms of assessing and meeting desirable risk profile and appetite". And fourth, SAS provides ZaBa with tools for risk reporting, such as operational reporting for daily management purposes, reporting to UniCredit Group accounting standards for the consolidation of financial statements, reports for local and group-wide audits and for industry regulators including the Croatian National Bank and Bank of Italy.

Satisfying a huge appetite for information
"We began using SAS to provide standardized reports on credit risk exposure," says Bilandzic "Previously, we'd used manual reporting, which was very labour-intensive and time-consuming. SAS understood our business needs. We could customize our reports and ensure they were delivered on time. The system was easy to use, even for people with limited SAS knowledge." Having access to a powerful reporting solution had a major added benefit: increasing the bank's appetite for more reports on a daily basis and motivating ZaBa to increase the availability of its data.

Credit risk data is gathered from more than 20 source applications on various platforms – including those dealing with account, client, exposure and collateral – with extracts available daily if required. ZaBa has also set up Web-based market risk reporting.

"The software's ability to deal quickly with ad hoc queries is a key benefit," says Bilandzic. "An efficient reporting system is of course dependent on data availability. Our competitive environment and the requirements of internal management and external regulators led us to collect and organize data in a more structured way, most recently through a data warehouse." Any mistakes or omissions are corrected centrally, with a clear audit trail covering who, what, when and how.

A direct impact on costs and profitability
Increased data availability prompted ZaBa to develop new risk models. "Modelling and the insights provided mean we can address internal needs, like process enhancements, and external requirements like changes in regulations and Basel II," says Bilandzic. "Such activity has a direct and immediate effect on our costs and profitability."

Models developed cover a number of activities. They include a provisioning model for more than 800,000 individual customers (overdrafts) and a further 130,000 loan accounts. ZaBa has also developed a model to help implement IAS 39 principles (for the recognition and measurement of financial instruments, in particular derivatives) well in advance of the necessary regulatory changes being made by the Croatian National Bank. ZaBa has deployed models in new product design for individual customers – to help grow market share without jeopardizing the bank's risk profile – and in client behavioural scoring for credit risk monitoring. ZaBa was the first non-Italian bank in the UniCredit Group to develop such scorecards.

ZaBa used SAS to develop simple systems for tracking credit and market risk, providing balance sheet reports and industry sector analyses. Bilandzic says, "We've also built more sophisticated applications. The most notable help us deal with any legal cases against the bank, replacing paper-based evidence, while our Internal Rating model collects all necessary data, calculates and validates ratings and provides reports."

Basel II
The planned implementation date for Basel II is December 2010. In this area, Bilandzic is confident the solutions in place provide ZaBa with a strong basis for meeting the requirements of all three pillars. "In Pillar 1 we have sufficient historical data to calculate probability at default and to start modelling exposure at default as well as loss given default. With Pillar 2 we started to work in close cooperation with the Croatian Central Bank and, of course, in Pillar 3 we have a very advanced SAS based risk reporting system. We anticipate no major problems in fulfilling our disclosure requirements."

Faster 'time to intelligence'
"Using SAS is like having another person in the department," says Bilandzic. "And from the outset we've worked hard to educate people in how they can get the most out of it. I'm very proud when, for example, the Italian member of our management board responsible for risk asks for a significant report and we can do it. A few months ago, he wanted a report showing the breakdown by industry sector, by segment, in four major regions, by statements and over the past five years. My team did this with SAS in just one day. I'm very proud that my department can respond to ad hoc requests like this so quickly. It's all about time to intelligence. More recently, the Croatian Central Bank was very impressed at how easily we could give them any type of information they wanted, any type of disclosure. I cannot imagine how this would be possible without such a powerful tool."

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