In August, GTR gathered leaders from the trade and export finance industry in the Nordic region to discuss key trends in funding demand, the recovery from the pandemic, emerging digitisation efforts, a profitability squeeze driven by tighter regulation, and how the energy transition is shaping the sector.
- Marie Aglert, director and head of department – large corporates, Swedish Export Credit Agency (EKN)
- Stefan Carleke, head of trade finance Sweden, Handelsbanken
- Björn Lidbeck, head of emerging markets trade finance, Swedbank
- Shannon Manders, editorial director, GTR (moderator)
- Allan Nielsen, global head of sales, SEB
- Antti Niemela, head of transaction banking, large corporates and institutions, OP Financial Group
- Patrik Zekkar, speaking at the time as head of trade finance and working capital management, Nordea
GTR: Covid-19, trade tensions and macroeconomic shifts are some of the issues affecting the trade landscape. What impact have you seen on trade flows in the Nordic region in the last year?
Aglert: The most notable change in the last year is the delivery delays that Swedish exporters are experiencing when it comes to the lack of semiconductors. This has affected our business in the sense that we have seen an increase in the number of extended delivery periods in our guarantees. So each transaction takes a lot longer. Another trend that we have seen this year is that we haven’t seen any new delayed payments. The situation is really very good from our perspective. When we look at the financials of our exporter clients around the world, they are strong.
Zekkar: We have seen throughout the pandemic that recovery varies across industries and countries. We also saw in half year financial reporting that the Swedish industry is doing very well. Denmark is doing very well. However Norway is still having some challenges; we see a slight recovery, but they are not back on track, and I think they were hit very severely with Covid-19 and the drop in oil prices. So there is still a way to go before they are back to normal.
We think that we will see companies delivering good figures in October, including both import and export volumes. But delays have been more frequent and we are starting to see difficulties getting container capacity. Containers are all over the place currently.
Lidbeck: If we look back a year ago, things were very sad and we were renegotiating quite a few financings in the emerging markets specifically. But since then things have picked up very well. Ironically, the only bright spot we had a year ago was the consumer retail industry, but now that is lagging a bit behind the rest. Overall, the situation is much better than we feared a year ago.
Niemela: The system passed the Covid acid test. What we saw was that trade financing was used even more as a source of liquidity.
Secondly, uneven geographic recovery and delays in deliveries and so forth pushed companies to think about the risks in their supply chains, but those supply chains are so complex that it’s not possible to change them very quickly. Lots of companies were considering how they would reshape their supply chains in order to increase their resilience – and we might see more from that in the near future.
GTR: How is trade and export finance performing, given these challenges?
Niemela: If I look at the figures, I see growth, both on the plain vanilla trade finance side and on the factoring side, which includes supply chain financing. So in terms of volumes, there’s been nice, steady growth since the end of last year.
Aglert: EKN had a record year last year, even when excluding our crisis products. We did SKr125bn in new guarantees, out of which SKr65bn was normal business. And that was a record year that had nothing to do with Covid. This has continued: we have done SKr38bn in the first four months of this year.
A very interesting trend we’re seeing is that our portfolio is getting very polarised. We see high demand from OECD countries, not only due to 5G investments, but across several sectors: wind, energy, and of course telecom. But we are also seeing an increased demand in high-risk countries, particularly in Africa.
GTR: There is a lot of talk globally about nearshoring, reshoring and making supply chains more resilient. Is it a trend that is playing out in the Nordic region?
Niemela: That’s an ongoing discussion. Supply chains tend to be so complex that you can’t change them just like that. It’s on more of a level of strategic thinking at this moment, although if there are opportunities, companies will take advantage of them. In previous crises we have seen that supply chains have been affected somehow, but the global supply chains are still there.
On the financing front, important and strategic suppliers are being embraced with supply chain financing and other structures just to make deals more favourable for the suppliers and of course, for the core customers as well.
Lidbeck: Remember the difficulties faced by Nordic mobile phone manufacturers to secure battery deliveries decades ago? Today, with the shortage of semiconductors, supply chain finance is obviously very important. Not only for the financing needs, but also to tie up strategically with suppliers.
Nielsen: I’m not sure I truly recognise that picture. I think it very much depends on the clients.
During the pandemic, we have seen the large corporate segments consolidate in cash like never before, and now we see more banks really pushing the cost for those deposits on to clients. So in the large corporate segment I see more of a need for that cash being put to use, rather than there being a need for additional supply chain finance.
Niemela: My discussions with large companies and institutions is that sometimes they have lots of orders, but they cannot deliver because the components are scarce, for example. So they have to make themselves more favourable to the suppliers, to get the components in order to sell to their selected customers. One way to do that is to use supply chain financing structures and extend the programmes that are already in place.
Lidbeck: Cash rich or not, supply chain finance improves the cash conversion cycle. So it has strategic ingredients in it.
GTR: We’ve talked about the immense demand that EKN has seen and the support that it has provided for the region’s exporters – what impact is this demand having on the agency’s strategies and priorities?
Aglert: During the pandemic, we had extremely high demand for our crisis products, particularly the working capital guarantees for large corporates and medium-sized corporates. Then we saw during the spring that demand decreased; we had discussions with maybe one or two companies, but they had other problems rather than Covid-related problems. So we stopped offering that product this summer and today only offer this crisis product for SMEs.
Apart from that, our priority today is of course to prepare for the climate transition.
Niemela: I have to say, compliments to Finnvera [Finland’s export credit agency] as well. I think all the export credit agencies (ECAs) have been supportive. We are in the same boat; we all work to overcome the crisis.
Zekkar: I can only echo that I think all the ECAs have been very cooperative and good to work with. This crisis has been a reminder of why we have the ECA structure. Sometimes when things are good and you don’t need the umbrella then we can be a bit grumpy about the ECAs – so this is only a positive development.
Aglert: Just like after the 2008 financial crisis, we are getting some new clients that hadn’t used our product before. These clients often have business models that differ from what we normally see, and hence, we had to be more flexible and develop new structures and products.
Another trend that we have seen that has continued – and might have increased – is the demand for supplier credits. Transactions that used to be structured as buyer credits, now are structured as supplier credits. They are transactions that are quite large, with a longer tenor than normal. We also saw that before the pandemic, but it has continued.
GTR: Trade digitalisation has been brought into sharp focus by the pandemic: what sort of digital trade successes are you seeing emerge across the Nordic region? What’s the big story in the Nordics when it comes to trade digitalisation today?
Zekkar: The development boom in the banks, as far as I can see, has calmed down and we are instead utilising the massive increase in startups and fintechs which come up with good ideas. We have started to understand that we don’t need to do or develop everything ourselves, but we can utilise smart people with a specialisation in developing or coming up with something we need. And there are a lot of Nordic companies which have brought good products and services to the market and are going global with them.
Carleke: A question for the future is, will there be a transformation in the infrastructure of trade finance? Will it be blockchain instead of Swift that will be the platform for trade finance? There is still a lot of development being done there, and the question remains.
Niemela: When Covid began we had the tools, but we started to use them more eagerly, because we had to in order to facilitate trade. So in that sense it was boosting the applications of the commercially available tools that were already there. In the Nordics we’ve been frontrunners and already doing lots of digitalisation before Covid. That was a blessing.
Before, there were lots of discussions between banks and technology vendors, fintechs, etc. But now, it’s more of a triangle in which corporates, financial institutions and vendors are at the same table, talking about the actual business challenges. And then people from the technology side come in and continue from there. So there is cooperation in that sense. It’s an open innovation. When someone comes up with something new, they share it throughout the network.
Nielsen: I have to say I’m not super impressed with our ability to come together on digitisation. I think we are still way too defensive in terms of our own little courtyard. We’ve been talking about it for a long time, but I still don’t see a general interest within the community to truly start the necessary standardisation.
Zekkar: When it comes to working with parties outside the banking community in the Nordics, I think we can do much better.
But in terms of consortiums for building the next generation of infrastructure for trade globally, then it’s very difficult for us in the little Nordics to have a strong execution power to get things done. We should maybe be more cooperative than we have been and speak with one voice rather than as individual banks, because each of us is pretty small compared to the likes of HSBC, Standard Chartered, Bank of America, etc.
GTR: It may be that trade digitalisation is not the answer to all the issues that banks may have. Away from digitisation, what are Nordic banks doing to achieve economies of scale in their trade finance business, and ensure better efficiency in their letters of credit and guarantee handling, for example?
Carleke: Forecasting two or three years ahead, at Handelsbanken we realised our financial institutions/correspondent banking department was not adding much value to our earnings. Instead, we now have a very big partnership with the Swiss bank UBS where we buy our back-office infrastructure from them, like using their financial institutions network and limits.
We have dismantled our own network because we didn’t think it was good enough and we forecast huge problems with that in the future, since we’re feeling that the demands from supervisory authorities in relation to the need for having Swift keys with banks all over the world was a huge question mark and there were a lot of costs behind that. So we have made a very huge change in relation to that.
We also dropped our export finance because it was not profitable. This is something EKN should think about because if you don’t have enough products for the banks then they will withdraw.
Niemela: You touched on a good point, because the general thinking about trade financing is that it’s very profitable. But due to all the know-your-customer (KYC) regulations, capital requirements, and the intensive manual work that is in place, trade financing is in a bit of a profitability challenge in that sense.
Aglert: This is really a serious future problem for the Swedish export industry. Sweden is completely dependent on export and particularly so into more challenging markets, where exporters are very active.
At EKN, the guarantee holders used to be Nordic banks. But today, our guarantee portfolio is dominated by the international banks. The Swedish export industry is getting dependent on international banks and I think that’s a serious problem for the future. I don’t know if our products will help or not, but I also hear that some of the SMEs have difficulties actually getting banks to receive payments from other countries. This really is a challenge for the Nordic region.
Zekkar: It is a challenge. And we see that the financial supervisors are on steroids right now, targeting trade. Partly fair and partly unfair.
The parties which will pay the bill at the end of the day will primarily be the SMEs, because there will be limited economic sense to do that type of smaller transaction, given banks’ cost of transacting. That may hamper the prosperity and growth of the Nordic economy, where SMEs play a vital role.
Scale will be important, of course, to achieve a cost of service which is reasonable for small transactions. If you look at the economy in the Nordics, most of the payments are low value transactions. Although there are a few large corporates with large contractors like equipment manufacturer ABB, Volvo buses, etc. The region is built on small business transactions like spare parts, maintenance, etc. Absolutely, we will have a significant problem with this going forward if there is not increasing digitalisation and automation.
Niemela: Digitalisation is something that comes into play – we have to make things more efficient and upgrade our systems and processes. It’s a strategic choice. Of course, we could choose not to do anything, but we would be in trouble in terms of profitability.
But one caveat is that we cannot go from zero to 100 instantly. We have to take steps, and we have to ensure that the organisational structures and the processes are capable of digesting digitisation.
GTR: Another area that the region has obviously led on for quite some time is that of ESG and sustainability. What challenges still exist in the Nordic trade and export finance community when it comes to making even more progress on that?
Aglert: Sweden is really in the forefront when it comes to sustainability. We have sustainable products and the country can play an important role in the climate transition. Of course, financing can be a tool here and at EKN we are committed to drive this climate transition in line with the Paris Agreement. We do that in two ways. One is developing green products and the other is limiting support to activities not in line with the Paris Agreement. This means that there are certain projects that we cannot continue to support: the extraction of coal, gas and oil.
The more challenging part is developing green products, and we are launching a specific project for supporting small and medium-sized companies in Sweden to carry out green projects.
One very good example of where I think we should be in the future, but are not at the moment, is in the production of gas turbines. When gas turbines are exported from Sweden to emerging markets for use in new power plants, they are very often run on natural gas with very high greenhouse emissions. I hope in the future we could support those countries with financing to make it more profitable for them to invest in running those on biogas.
Zekkar: We are actually running a very interesting ESG scoring initiative, under the we.trade umbrella with banks and a partner, where we will be rolling out a platform, a turnkey tool, where the customer gets a questionnaire to submit in order to get an ESG performance score. This is something which is expected to come to the market in September and be rolled out step by step.
The ambition here is to try to create a standard for ESG performance scoring, using international principles. I know it’s very ambitious to try to drive something internationally, but we think that the drivers will be there because you will need to KYC your ESG sooner or later.
Already, it’s a kind of voluntary push that if I take on a new supplier or a new trade corridor, I need to check them out. It’s better that we take the initiative rather than the regulators take the initiative and push us, and then have everyone running their own race.
GTR: Finally, what are you most optimistic about for the rest of the year and into 2022?
Nielsen: Let’s get together – world trade needs us.
Niemela: I think the sustainability topic that we’ve been discussing is something that will kick in in a big way, a positive way, in 2022. That might have even more impact on our trade flows than we expect at the moment, and it might come faster than we think.
Carleke: Partnerships will be a huge thing in the future, as well as environmental and social responsibility in trade.
Lidbeck: Let’s use the opportunity now to get rid of physical documents. We’ve seen the need during the pandemic. There’s a high level of IT maturity in the Nordic countries, and I think that’s a really good opportunity for us. If we are cooperative between the Nordic banks I’m sure we could make a lot of difference in the coming years.
Aglert: I hope that we can contribute to, and support, exports as the world is picking up pace after the pandemic – particularly in infrastructure projects in emerging markets. We have capacity.
Zekkar: Trade is built on cooperation. Let’s come together and execute on digitalisation, ESG and partnerships. We have the tools.