Nordic export and import volumes have dropped significantly. The rising tide of loan losses in the banking sector paints a worrying scenario for the main players in the market. Shannon Manders reports.
As GTR goes to press, Sweden’s central bank has announced that it expects mounting loan losses for the Nordic country’s banks.
In its financial stability report, published in early June, the central bank projected possible loan losses at major Swedish banks of Skr170bn (US$21.23bn) this year and next.
Analysts say that fears of a deepening recession in the Baltic region, where Swedish banks are heavily exposed are hurting bank shares. Swedbank’s shares have fallen 7.9%, and rivals SEB, Nordea and Handeslbanken were also down – though to a lesser extent.
But Sweden’s Riksbank is confident that the firms can handle the fallout. “The banks have sufficient capital to meet larger losses than this, and are well-capitalised in an international comparison,” the Riksbank said in a summary of its report.
The bank added that there are signs that parts of the financial markets have recently begun to function better and that stress tests on the banks indicated that they could handle a much worse development and still meet capital adequacy requirements.
Yet, however strong Nordic economies are, they will inevitably be affected by the recession suffered beyond their shores. This is clearly demonstrated by the slump in exports.
During the first quarter of 2009, exports from Sweden decreased by almost a quarter, with a recorded 21.4% fall in volume, compared to the first quarter of 2008. At the same time, Swedish imports of goods decreased in volume by 18.2%. The machinery and transport equipment sector, accounting for nearly half of Swedish exports, decreased in volume by 29%.
According to Claus Asbjørn Stehr, head of trade and project finance at Nordea, Demark was the first Nordic country to be hit by the recession – both on the importing side, and consequently, on the exporting side.
“If we look at it from a severity point of view, Denmark and Finland are the ones most hit at this stage in terms of the reduction in trade,” says Stehr. “Sweden is in third place.” Stehr purports that the reason Norway has perhaps been less affected is due to the country’s oil production.
Evidence of a decline
The majority of local Nordic banks are reporting a decrease in trade volumes. Both large corporates and small-to-medium enterprises (SMEs) are struggling to export, and importers are sitting with a lot of stock – still able to sell, but not as was possible before the crisis.
As such, it is largely reported that customers are seeking to utilise more secure trade finance instruments to a larger extent than they did before.
“You see a drop in volumes, or a postponement of volumes, and at the same time, people are seeking additional security – moving away from clean payments to collections or letters of credit (LCs),” says Henrik Schriver, first president of trade and export finance at Danske Bank in Denmark. “Both importers and exporters are trying to perform signing contracts. Many companies have used up stocks instead of entering into new contracts – and they have tried to put everything on hold. What does transpire, they want secured.”
In line with the global trend, the capacity for credit insurance in the region is lower – largely due to limits being cut. Both banks and credit insurers are treading somewhat cautiously, and the need for security is great.
“We’ve seen a decrease in trading,” says Jyske Bank’s head of trade finance, Emil Menke. “Last year, we had a very good first nine months, and then, when we reached October, everything stopped.”
But the bank does not attribute this decline in business to a lack of liquidity, as they claim they have indeed been able to finance their existing clients. Instead, the reason for their reported 30% drop in turnover is due to a general decrease in demand.
More specifically, says Finn Castella, Jyske Bank’s head of division: payments and trade finance, is that imports from Asia are being reduced. “That has been big business for us, and is a main issue relating to the drop in our turnover.”
Another bank that is experiencing a dramatic decline in business is Danske Bank, which has reported a 10-12% wane. However, the decline is not as much as would be expected, considering the cutbacks in the region of 20% on container traffic in and out of Denmark, says Schriver.
An appetite for risk
The appetite for risk has shrunk immensely, says Nordea’s Stehr.
What had previously been regarded as safe countries to do business with have now been subject to heightened negotiations and credit risk assessments.
Fewer banks are in the market for assuming risk in the business, and at the same time, the maturity on the business being done has been shortened to what it was before.
Newcomer to the Swedish market, DnB Nor has reacted favourably to the fact that the situation has forced customers to change their behaviour and increase their requirements for risk sharing. “It opens up possibilities for banks like us, for instance, which are quite new to the Swedish market,” says Elisabeth Norberg, head of trade finance sales at DnB Nor.
Norberg notes that trust is an issue that has changed dramatically. “Everybody wants to secure themselves as much as possible.” Whereas in the past, clients would be comfortable with making use of an open account, Norberg explains that they are now more inclined to support the open account with a standby LC as security for the payment. “Of course, this opens up new trade finance business volumes.” Norberg names the Middle East and South East Asia as regions where the bank is currently seeing an increase in this type of business.
It does, however, remain difficult for clients to obtain longer-term risk hedging from banks. Norberg notes that cooperation with export credit agencies and other multilateral financial institutions is of essence – both for the bank as well as exporters – to secure risk capacity for longer-term risks.
Looking ahead, Norberg forecasts that DnB Nor will proceed with caution, with slow growth, and with a focus on existing clients. But, she remains somewhat optimistic. “We have been through a crisis before, so why shouldn’t we come out of this? Perhaps things won’t be the same as they used to – but I think that is part of the game, so to speak.”
Traditional trade products
There seems to be no doubt that whether it is trade finance or capital market products, last year’s collapse of the developed financial industry has resulted in the majority of banks returning to the basics of the business. As such, the more straightforward, traditional trade products are generally becoming the tools of choice.
Håkan von Sydow, senior vice-president head of trade finance at Handelsbanken in Sweden, reports that clients are moving back to more traditional forms of trade finance to secure the flow. “Since the liquidity crisis, customers have been trying to get the financing locally, instead of us raising some export credit facility for them,” he adds.
“The development in the trade market, in the value chains of import and export, has slowed down,” says Nordea’s Stehr, adding that he believes high speed in development may return at some point in the future. “But right now, the wounds from the crisis are so deep that it will take some time before that happens.” He asserts that it is imperative that products be more transparent and understandable until such time as there’s more confidence in the market.
In December last year, Nordea launched a strategy, which they called the ‘Middle of the Road’. The scheme epitomises how the bank will be looking to conduct its business in the future. Stehr explains how banks may be veering to the one “side of the road” – namely to carry on with business as usual – which, he believes would be both difficult and dangerous in the current environment. Alternatively, banks may be heading for the other side of the road, says Stehr, and as such are planning to close business altogether. “We will not follow any of those scenarios,” he says. “We will stick to the middle of the road by pursuing good business, but primarily with our present customer base.”
Nordea will not partake in aggressive market penetration on the corporate side to attract new business. “When we do take on new corporate customers, it will be done on a selective basis only, as our strategy is very much to use our resources towards the existing corporate customers,” Stehr states.
An innovative mindset
One bank that is not reporting a decline in trade volumes is SEB. “It’s easy to say that trade volumes are declining,” says SEB’s Patrik Zekkar, head of trade finance Sweden. “But in our books, it doesn’t. It’s growing. There’s still a demand from China, Malaysia and Vietnam. It’s not like the market is dead.” Zekkar notes that some sectors are pumping out good volumes, with others having moved their target areas.
The bank is also seeing new markets in OECD countries. “We are confirming Japanese banks in Tokyo, which we haven’t done before, and we’re confirming Spanish banks in Madrid. It’s opened up a totally new risk management issue,” says Zekkar.
SEB believes that its clients are looking at trade finance and cash management in a different way. Instead of regarding them as two separate entities, increasingly they are regarding them as two sides of the same coin and demanding that the bank offer an approach to both services that reflects this.
A few years ago, the bank undertook a totally new take on the trade finance business and released hundreds of new products. “We called it Trade Finance 2.0,” says Zekkar.
SEB’s methodology of pushing the trade finance value chain, with a focus on working capital, risk management and process efficiency is what they are relying on to guarantee the lowest cost and fastest turnaround time. The bank now also has a better balanced ratio of front-end staff to back-end, especially following the outsourcing of document examination to Wachovia in Hong Kong.
SEB is also focused on examining trade flows and allowing importers and exporters to take a much firmer grip on the working capital process. Zekkar highlights the fact that the bank is working on trimming down the number of days in the trade finance process. “We can reduce the time from 30 days to three days,” he explains.
“It’s about getting your money working, as opposed to having it float around on a piece of paper on somebody’s desk,” says Zekkar, explaining that it would have obvious benefits in that people will be able to get their money sooner.
The bank is looking to launch a number of new products before the end of the year.
Traditionally with LCs, the presentation of the document and cash are combined – they are one and the same. “We are keen to do a solution where we separate documents and cash – to lead their own lives, so to speak,” says Zekkar, adding that this strategy will certainly relieve companies from cashflow pressures, regardless of when the presentation of documents takes place.
The second product – also on the import side – is the simple LC, what Zekkar calls the “LC Light”, which would look at cutting the service down to the very core.
“For example,” says Zekkar, “paying us to take care of the handling of the documents, but not, for example, to examine them. But, if we are asked questions relating to what is in the documents, then we would charge an examination fee. This is especially convenient for importers.”
“It’s about going into an environment where we have a ‘naked’ solution – but with ‘add-on’ options,” he explains. “With this, we are much more likely to meet the different demands in the market. Instead of having these traditional offerings, where you have thousands of options that are included in the price. The banks need to go this route.”
“We are also working on solutions to assist companies in extending accounts payables days and reducing the costs of procurement.”
Focus on pricing
Raising the issue of the increase in pricing, Marko Rönnholmen, head of trade finance sales at Swedbank, Sweden, notes that there appears to be some form of “Nordic pricing in the business”, in that the banks are currently not entirely in agreement about what the prices should be.
“Prices have gone up,” echoes Nordea’s Stehr. “It has doubled in some areas and quadrupled in others.” Stehr explains that a few years ago, a price – in many respects – was a reflection of the credit risk. “Today, price is a combination of credit risk and the liquidity premium that you need to pay in the market for a certain maturity – and sometimes the liquidity premium can be higher than the credit risk premium.”
The competitive scenario in the Nordic countries has always been fierce, says Danske’s Schriver. He explains that if one considers the past five to eight years, many European banks have always been very taken aback by the price situation in the Nordics. “I know a lot of the European banks have backed off from the major Nordic corporates because the pricing was simply unattractive.”
Schriver believes that the steep increase in pricing as a result of the crisis has balanced out the field, and minimised the pricing gap that had set the Nordics apart from its European neighbours.
Competing in a market with only a few high-ranked export companies but several banks – both domestic and international – creates a market which had, up until the crisis, been “ruled” by the exporters, says Swedbank’s Rönnholmen. He adds that this has been confirmed by some export companies as well. “The prices have been quite pressured, especially for the top-tier export companies’ business, but due to the current situation in the world economy, we are now seeing a situation where we are returning to relevant price levels that mirror reality,” he concludes.
It is generally regarded that the Nordic banking region is somewhat overcrowded, with as many as seven “major” local banks and numerous global banks vying for business. The Swedish market in particular draws much interest from global banks, due to the structure of its industrial environment.
Though it appears that some consolidation is taking place in response to the crisis, this is in the form of internal integration as opposed to external take-overs.
Furthermore, many Nordic banks are closely involved in the flagging Baltics, which makes them vulnerable in their home markets, and according to a banking source, may make the banks consider mergers.
In fact, GTR’s source reveals that local bank DnB Nord, which set up operations in Denmark in 2006, has chosen to consolidate its business activities, and focus on the bank’s core markets, which are the Baltic countries and Poland. As a result of this, the bank plans to reorganise its activities in Denmark and Finland.