As the Nordic region braces itself for the full force of the European crisis, bankers and corporates debate whether the trade finance industry is prepared for what lies ahead.
Roundtable participants:
- Mauro Bonacina, vice-president, relationship and sales officer, BNYM
- Carina Gyllenbring, senior vice-president, head of trade finance, Swedbank
- Katerina Lodin, senior advisor, TradeWiz
- Shannon Manders, deputy editor, GTR (chair)
- Joachim Olsson, deputy head, trade & export finance, Handelsbanken
- Colin Robertson, treasury services, head of sales, Emea, BNYM
- Angelica Scovino Lips da Cruz, global head of trade & supply chain, product management, SEB
- Christer Söderström, manager, customer & supplier financing, Electrolux
- Axel Stridsberg, head of trade finance, Sweden, Nordea
- Pär Ullbro, vice-president, head of trade & export finance sales, DNB
- Sten Winther, trade & export finance, Danske Bank
Manders: Factors such as the euro crisis, the impact of Basel III and the upheaval caused by the Arab Spring have affected access to working capital across the globe. What are the most important issues influencing the Nordic region, and do the Baltic and Icelandic recoveries offer a glimmer of hope?
Söderström: If you rank those four, the euro crisis has by far had the most impact, followed by Basel III which, going forward, will divide companies into two segments: investment-grade and non investment-grade. The non-investment grades will face real problems in terms of funding, or the funding will at least be fairly expensive.
The social unrest of the Arab Spring is unpleasant, but I do not think it has any real impact on liquidity as such. I am sorry to say that Iceland is a minor community and a very small economy, so it has not had any effect at all. The fact that the Baltics are recovering is good. It has a small effect on Swedbank, SEB and others, but not substantially.
Stridsberg: The first two are absolutely the most important ones. The euro and Europe are affecting us very quickly. We put more focus on Basel III in terms of what is to come, which is not clear yet, but for us as a bank it will have a big impact. The political situation can change tremendously quickly, so that is something that we really have to be prepared for, and action has been taken already to mitigate such risks.
Ullbro: One of the second wave effects from the euro crisis is the declining demand for imported goods from Asia. The Asian production of goods aimed for Europe and US is a major driver of the Asian economy and when demand falls in Europe and the US it affects the workers from emerging Asia who work in China, Taiwan, South Korea, and so forth.
Lower demand is followed by lower production and the need for foreign labour decreases. The workers from emerging Asia are not able to send remittances to their home countries, so people in these emerging countries cannot keep up demand, which in turn affects the whole economic supply and demand chain in Asia but foremost the development of these emerging countries.
The big challenge with Basel III will be the constraints on capital. Basel III regulations in their current form will most probably affect global trade in the way that financial institutions have to prioritise what business areas to focus on, depending on profitability and core business areas. Furthermore, this will affect the trade finance area, because most trade finance customers are still SMEs and non-investment-grade companies, which will – according to Basel III – be a more costly customer segment to the banks’ balance sheets.
Lodin: What I see when I work with customers is that Basel III is affecting them already. It has to be implemented by 2016. Some banks are already saying that they adhere to Basel III and have increased their costs, without having any really clear guidelines in this particular area. When we speak to international banks and different regional banks, they have a different approach and no clear strategy on this.
The most recent positive news from the International Chambers of Commerce (ICC) is that the Basel Committee is reconsidering the weighting on trade finance products, which will really help international trade as a whole. This is a strong message that needs to come from both the corporates and the banks as they need to reconsider the impact on trade finance products.
Gyllenbring: It is really good that the treatment of the trade finance business is under discussion. You can see a little light at the end of the tunnel and it will affect the business positively.
Stridsberg: One thing that is very important for Electrolux and others is that the corporate side also participates in this effort. For banks, of course, it is in our interest, but we need to understand that this is not only for the banks, but that it will have an impact on corporates. If we can join forces, that would be very fruitful for us all.
Manders: Do you think that banks are educating their customers as to how Basel III will affect them?
Lodin: Banks don’t even have guidelines themselves.
Scovino Lips da Cruz: We have started seminars and discussions about Basel III for our clients. It is something that we should all be doing.
Lodin: It is important that the corporates and the banks also open discussions with the finance inspection, because if they interpret this incorrectly, it will be a major disadvantage for the Swedish society. It is important that they have a good and early dialogue about this.
Manders: Would you agree that, despite these challenges, the region has come through the crisis quite successfully?
Gyllenbring: I am not sure that we have seen the worst of the crisis yet. The crisis is knocking on the door. There could be even worse things that are waiting for us and which we need to take into consideration.
Stridsberg: I must agree that, so far, we have done comparably well, but we should remember that the Nordic economies are very open economies, and we are very dependent on trade and our exporters and importers. Of course, if there are some disturbances in the banking market, that could be a problem. We are dependent on a well-functioning interbank market.
Olsson: We have still not seen the effects from, for example, France and Germany. Our exports to the PIIGS [Portugal, Italy, Ireland, Greece and Spain] countries are quite low. The largest exports from Sweden go to Germany, Norway and the UK, not to Greece, Spain or Italy. Italy is quite a large market in Europe but these countries are still not Sweden’s largest trading partners. Germany and France have a bigger effect on Sweden.
Winther: We can see from the figures that Danish exports to European countries have decreased.
Gyllenbring: We in Sweden have seen the first sign of exports really slowing down. If this crash really happens it will slow down very quickly, and then we will have a problem.
Olsson: If you compare it to early 2009, Swedish exports were down by 40-60% compared to now. We have not seen those kinds of figures yet. It might be that we haven’t seen the worst yet.
Manders: Will the region thrive in recessionary times? What will be its downfall?
Olsson: Last time it happened, in 2009, it was a little bit of a crisis, but it was still an emerging market, China, that was the engine. If something happens in China, we will have a problem. The US is coming back, but slowly.
Lodin: I am a bit unsure. I think companies are a bit forewarned these days. They are starting to slim their costs very quickly now when they see the signals. They are not rushing full speed ahead and hitting the wall, so, from that perspective, it might be that it will go down, but I do not think that it will be a dramatic crisis for the Nordic region. I think we have learned our lesson and we will work more towards a slowdown in a sensible way.
Scovino Lips da Cruz: I agree. The Nordic region does not look like Southern Europe. We are better equipped and I believe that there will be a slowdown, but it will not be a terrifically bad case, because we are prepared. A couple of years ago, when more risk was being taken, before 2007/08, the Nordic region was in a good position; we were better capitalised, and we still are.
Söderström: I think that the recession, which I am confident will come, will be the biggest challenge for the corporates.
Even if corporates are prepared and lay off people and adjust production capacity etc, the economy will be smaller, with all the effects that that has.
Olsson: I think that the banks and companies have stronger balance sheets now compared to 2008/09.
Stridsberg: We have to listen to what Christer is saying, because if that happens on the corporate side it will have an impact on us. You mentioned China, but I come back to the political situation. If something goes really bad in Europe, starting in Italy or Spain, we will have a domino effect. Who is going to bail them out? Due to the openness of the Swedish economy and its dependence on exports, we will be harder hit in such a case.
Manders: In terms of new opportunities for growth, where are Nordic businesses exporting to and where are the new hot spots in terms of regions or business sectors?
Scovino Lips da Cruz: Looked at from a global perspective, the hot spot for trade is Africa. Asia would be another hot spot for cross-border working capital financing deals. That is what I see for the product areas that I operate in.
Ullbro: I think Africa will be very interesting in the future, as will the Middle East, after their recovery. We see huge potential in these areas. What we see now in Africa and the Middle East are mining projects and infrastructure projects. The energy sector and renewables is also in full speed ahead these days.
Robertson: How will European countries compete in Africa against the reserves that these Asian countries have?
Scovino Lips da Cruz: That is a very interesting point, because the reserves that Asia has are huge and are growing.
Ullbro: What we have seen is that it is tough for Swedish exporters to compete with Asian products going into Africa. A lot of Chinese companies are establishing themselves in Africa so the competition for our Swedish exporters is tough.
Söderström: I agree with Pär, but in terms of low-cost countries, at least from what I hear from our procurement people, we source masses of material from China, but also from countries like Ukraine and Russia. They are very low-cost from a production and salary point of view, and they are close to Europe. In our industry, they are one or two days away on a lorry with the products that we need. From China, it takes 45-60 days on a boat for us to have the goods in our factories. That is one thing that may change over time. Europe will realise that there is low-cost production closer than China.
Coming back to Africa, I guess that there will be a demand for consumer products, because that is how people raise their living standards. They buy fridges, cars and mobile phones. Just recently, Electrolux acquired a big Egyptian company as a hub for the Middle East and Africa. For Electrolux, Africa is more or less a blind spot, except for South Africa, where we have sales and production. I believe that buying this company is a start for us in terms of exporting to those markets. We have rather mature markets in other parts of the world.
Olsson: Sweden is still competitive. Sweden and the Nordic countries have strong brand names. Swedish quality is quite strong. Clients around the world talk about high quality, a strong brand name, and high-value products compared to other countries that have lower-value products. That is one of the main advantages that the Nordic countries have in terms of the crisis.
Manders: How are banks looking to differentiate themselves from one another as they move forward?
For example, international banks may not necessarily be able to compete on price, but they are able to connect their customers to new markets. What are you, as local banks, doing in order to take your customers to the next level and to expand into the rest of the world?
Scovino Lips da Cruz: The difference in strategies might settle the differentiation, but the question is: are you really offering the right product, corresponding to what the clients need? That is the difference. It is easy to say, ‘I am a big bank and I can do this because I am everywhere’, but if you look at the solution that these large banks have, it is very squared. Being a local bank, and taking the risk, we are in a different position to offer our clients a different and more customised solution.
Stridsberg: I think very much that being closer to the customer, you talk less about products and instead try to understand and create partnerships. You can be blinded by being a very big bank with a very big product portfolio. Some customers have said, ‘When they come in, they are very professional, but they are so product-focused because they feel that they have identified that they have a competitive edge, which is what they want to provide’. S
So being close to our customers, to understand and support, together with our own international units and cooperation with banks is our way of helping customers to expand around the world.
Söderström: In Electrolux we have a bank strategy, which I guess all big corporates have. We have 10 or 11 core banks that we work closely with. They have signed up for the revolver that we and most big corporates have. These core banks are a mix of international and Nordic banks and they have different specialities. We have SEB for trade finance in Europe; Deutsche Bank for supplier financing in the US; Citibank for cash management in the US; Deutsche Bank for cash management in Europe; and HSBC and Citi for cash management in Asia, and so on.
Some of the banks we believe are very strong in commodities and particularly raw material hedging, which is important for us. 40-50% of our total expenditure is on raw materials. We divide the bank group that we work with, because they can do different things for us. Being a Nordic bank is very good for us in certain business areas, but they cannot support us in others. It is not a strange thing, but something rather natural. One size does not fit all.
Scovino Lips da Cruz: In the coming years we will see changes in strategic terms in the banking sector. Banks will need to look at their structures. Given that banks might face funding issues in the future, we need to be prepared.
Certain solutions are better performed at certain banks. There will be more partnerships among banks in different markets and regions.
For example, large banks that handle larger revolving syndicated loans may remain strong in this area as volumes and low risk is key. On the other hand, banks with a strong relationship can offer clients other more flexible solutions to solve financing issues.
Bonacina: Partnerships between financial institutions are not a new concept. But rather than just a buying or selling of services, our experience shows that a more collaborative, value-based partnership model, such as the ‘manufacturer-distributor’ model, has the potential to generate greater value for all participants, while remaining directly driven by the evolving needs of end-user clients.
This model is predicated on the concept of local financial institutions, ‘distributors’, who have a sound knowledge and understanding of their corporate clients and domestic markets, leveraging the global transaction processing capabilities and extensive geographical reach of specialist global ‘manufacturer’ institutions.
Söderström: Banks have to be extremely good in terms of what we are discussing for
us to award them any business. One of the banks withdrew from the revolver that we are currently discussing. We closed the business like that and gave them no further business.
Manders: Would you agree that the Nordic ECAs have had a positive impact on growth in Nordic countries?
Olsson: There have been a lot of changes in Sweden’s EKN in terms of more business and fast decisions. During the 2009 financial crisis, it was an important element of the programme that provided guarantees to banks and provided companies with working capital. They also made it possible for companies to obtain a guarantee with OECD countries. They had a very important position during the crisis.
Winther: Last year, EKF introduced an SME guarantee in order to provide working capital for SMEs for transactions which would normally not be directly bankable. The guarantee was developed in close relationship with a group of local banks.
The benefit for the banks is that EKF offers 100% credit risk cover and on top of that, absorbs some of the operational risks.
Robertson: As banks have to address Basel III going forward, do you see ECAs having a greater role as banks have to focus on their own capital requirements?
Stridsberg: For the time being its beneficial both from a risk and capital point of view, and it will continue to be so. How much it will help in Basel III depends on what the rules and treatment of ECA coverage will be.
Manders: Is pricing on deals in the Nordic region as competitive as it was a year ago?
Olsson: It is at the same level as last year. We saw an increase in prices during the 2009 crisis. They are back at the same low level as before the financial crisis, so we are back at the same level as 2008 on the risk. In terms of funding costs, it is increasing. Gyllenbring: The prices do not always reflect the risk from the bank perspective.
Ullbro: In our dialogue with clients, we notice that they are aware of this. Because of the euro crisis and Basel III etc, they know that this will not last forever, so the dialogue is much more dynamic now. We still have to adapt to market conditions in order to be able to compete in the market.
Manders: Have local banks been able to maintain their competitive advantage in terms of pricing?
Ullbro: I think so. What I saw when I was a customer of trade finance banks was that international banks came and, every time there was a crisis, they disappeared. Our competitive edge in the Nordic is that the Nordic banks will stay here. Our strong relationship with our Nordic customers and our presence in the market are our
big advantages.
Söderström: On the trade finance side, I am pleased with the very small changes in price. The level is still similar as to what we agreed on more than two years ago. From my point of view, that is excellent. GTR
