Leading Spanish banks are reporting positive growth, despite the prospect of an economic downturn in the country. The market for trade and export finance has shown particular resilience, writes Rebecca Spong.
With the Spanish election looming, the state of the country’s economy is under close scrutiny. The country is facing rising inflation, a slowing property market and a stagnating economy. This in turn hasn”t helped the image of the Spanish banking sector, particularly within the securitised debt and mortgage-backed bonds market.
However, recent profit results suggest that Spanish banks are not as exposed to the market downturn as some of their European counterparts, with the two giants Santander and BBVA reporting strong growth during 2007.
BBVA’s full-year profits have increased by almost 30%, reaching €6.1bn in 2007.
Spain’s largest financial institution Grupo Santander released its annual results for 2007 in February, revealing that its attributable profit rose by 19.3%, making the bank the fifth largest financial institution in the world in terms of profit.
In an official statement, Santander’s chairman Emilio Botin refers to the figures as, “the best results in our history”.
From the perspective of the trade, export and commodity finance markets, neither Spanish bank has seen a downturn in business. If anything, this type of activity is seen as a key growth area for the banks.
The latest Dealogic tables for the top arrangers of global trade finance loans (excluding aircraft and shipping finance) for 2007 reveal BBVA as the top arranger having raised US$9.431bn in debt.
The Spanish bank stood ahead of a number of the key players in the market, with BNP Paribas recording US$7.671bn-worth of business in the tables, and Citi with US$7.321bn. Santander came in at eighth place with US$3.331bn.
In an effort to further improve their global ranking, both BBVA and Santander have made some key changes to the way they structure their trade, export and commodity business, over the past 12 months.
In September 2007, Nick Shaw was appointed global head of trade finance at BBVA, replacing Alberto Conde who left the position earlier in 2007 to move to become general manager and CEO of the bank’s affiliated bank in Panama. Shaw moved from his previous role at BBVA as head of trade finance in North Asia, based in Hong Kong.
In his new role, he is managing the bank’s reorganised trade finance operations. “BBVA set up its global trade finance division 10 years ago, and following an organisational change last year it now operates as a true global unit within the bank,” he remarks.
“We are no longer solely a Euro/Latin American bank. Although we still maintain a strong presence in Latin America, Asia has also become a key focus for the global trade finance unit and increasingly Eastern Europe.”
There is also a new face at Santander, with Federico Papa taking over as managing director and global head of trade, export and commodity finance, global transaction banking at the end of 2007. He moves from his previous role at ABN Amro where he was head of cross-border structured and commodity finance, Europe, Middle East and Africa.
Papa is also heading up a newly reorganised division, following Santander’s decision to merge its international cash management services and trade into one unit. By combining structured trade finance with cash management and trade services, the bank aims to provide a ‘one-stop’s shop for all the bank’s clients who trade internationally.
Papa explains: “The bank made the decision to specialise by asset class, bringing together all elements of trade into one unit.
“The intention of the new trade, export, and commodity finance division is rather than sell clients a specific product, to arrange a financing solution that suits the need of the client. For instance, some companies just require straightforward working capital facilities, whereas others look for more complex structured facilities to finance acquisitions or expansion plans.”
The restructuring is in response to market trends in global trade, he adds.
“Other options open to the bank when deciding how to structure its trade business included dividing up activities based on geographical focus, or splitting vanilla financings from structured financings. However it was decided the unit needed to reflect the globalised nature of trade.”
It is also designed to help adapt to the economic twists and turns in the market, given current levels of financial uncertainty.
“The beauty of having everything under one roof in terms of our trade finance offerings means that depending on the economic cycle we will have products that should suit the changing needs of our clients,” Papa explains.
According to Dealogic, BBVA emerged as a top lender in Latin America in 2007, having raised US$2.929bn in debt. Santander came in at second place raising US$2.557bn in loans.
However, and perhaps more surprisingly, BBVA was listed as the top lender in the Asia Pacific region (excluding Japan and excluding aircraft and shipping finance). Having raised US$4.065bn in 2007, BBVA beat off competition from Citi, HSBC, and ABN Amro, who followed the bank in second, third and fourth place respectively.
Since the launch of its ‘Asia Plan’s in 2005, BBVA has been actively seeking to increase its presence in the region. In September 2007, the bank signed an agreement with China’s Citic group to create mutual fund known as BBVA Bolsa China, created to support direct investment in companies based in China and the surrounding area.
Over the past 12 months, BBVA has drawn on its newly acquired knowledge of the Asian market to arrange structured trade finance deals setting a number of precedents for the bank’s future Asian business.
In March 2007, acting as sole arranger, BBVA closed a US$300mn buyer’s credit for Indian Oil Corporation (IOC). The deal is worth highlighting as it was the first-ever bilateral facility signed by IOC with a financial entity without a branch presence in India. It is also a GTR Best Deal of 2007.
The transaction also demonstrates BBVA’s ability to secure large-scale deals with major Asian borrowers, without necessarily having branches in the borrower’s country. It also hints at BBVA’s plans to increase its ‘on the ground’s presence in Asia. In 2006 it opened a representative office in Mumbai.
Korea is another key location for BBVA, and in early 2007 the bank signed a co-operation agreement with the Export-Import Bank of Korea. The agreement aims to encourage greater cooperation in the areas of trade and project finance, as well as helping to open up Latin American markets to Korean exporters.
Shaw at BBVA remarks: “Our depth of experience in Latin America has helped us in our Asian ventures.”
In particular, he highlights a US$35mn pre-export facility for Indian corporate Essar Steel, BBVA arranged through adapting techniques developed in Latin America.
In April 2007 the bank arranged the US$35mn facility for Essar Steel’s wholly-owned overseas subsidiary Essar Steel Trading in Dubai.
This deal was structured by the assignment of future exports by the supplier to the borrower and against the borrower’s future sales to third party buyers under LCs issued by international banks.
Santander is also looking eastward, having secured a licence for a new office in Hong Kong and looking to expand into Shanghai later this year.
Commenting on prospects for 2008, Papa remarks: “We are hoping to see a lot more China-related business which hopefully will include collaboration on deals with Sinosure.”
He adds that Santander is particularly keen to build on its existing success in Latin America to support its Asian growth.
“When looking at our geographical expansion, we are driving business from our core markets. It is good to have a clear understanding of where your business is going.”
He adds positively: “Our pipeline for Asia-Latin American trade deals is looking strong for 2008.”
For the meantime, Latin America will continue to drive the Santander’s business.
Santander chairman Botin is confident that market dips will not have an immediate effect, asserting in an official statement that the region is “very resilient”.
Talking specifically about Brazil, he states: “I can say with certainty that if this crisis doesn’t last more than a year, Brazil won’t even notice it.”
Shaw at BBVA is similarly confident about the continuity of business in its core Latin American markets, remarking that fears over the implications of the credit crunch should not be exaggerated.
“Of course margins are generally going up, but not across all markets. It is important to note that margins are far from hitting the levels seen on some pre-export facilities four years ago.
“Countries such as Brazil are now reaching investment grade, and the economic environment has changed significantly.”
Serving Spanish exporters
As well as BBVA and Santander, there are a number of other key Spanish banks offering trade finance products, mainly aimed at domestic Spanish exporters.
According to Fitch Ratings, in terms of total assets Banco Popular Espanol is considered Spain’s fifth-largest banking group. Judged on its profitability, it ranks in third place.
Unlike the top two Spanish banks, its core expertise is in retail commercial banking to small and medium-sized enterprises (SMEs) and individuals in Spain. Around 95% of its profits are generated in the domestic market and during 2007, 39.32% of the bank’s total revenue was generated by SMEs.
Banco Popular pays particular attention to ensuring it has a strong network of branches to ensure close contact with customers, and has a network of nearly 2,500 offices in the Iberian peninsula.
In terms of its trade finance provision, documentary credits form the backbone of its business, but it also offers guarantees, loans, factoring and international leasing operations.
Ramon Maeso, director, international corporate banking – trade finance, sees a number of opportunities over the coming year in terms of expanding the bank’s geographical reach. “Latin America and all the new EU member countries are the focus of interest for our clients,” he observes.
“For different reasons, including sheer market size, dollar weakness – our customers also pay heed to the US,” he adds.
However, the bank will typically support Spanish exporters wherever they choose to go. “Supporting the export of desalination equipment to Mongolia is probably the most unusual transaction we’ve worked on over the past year,” he remarks.
In terms of its physical expansion, the bank has scheduled to open over 30 new branches this year within Spain. At an international level, the bank has also completed the acquisition of Totalbank, a retail bank in Florida in 2007.
Winning ECA backing
In an effort to better support the country’s exporters, Spain’s export credit agency (ECA), Cesce, has just finished its second phase of reforms, and is readying itself to promote its products and updated guidelines. Changes affect third country content elegibility, local currency financing (without crystallisation), enhanced cover of export-related bonds, comprehensive 99% cover, pre-export financing facilities, and so on.
Spanish exporters often find themselves playing a key but sometimes relatively small role in international projects, with Spanish companies sought after for their engineering and technological expertise.
However, under previous regulations Cesce would only be in a position to help support these exporters through export credits and guarantees if the foreign (non-Spanish) content level was less than 15% (up to 30% for EU origin). Such requirements limited the agency’s ability to support many companies’s international transactions.
However as of the beginning of 2008, the agency has changed its requirements introducing far more flexibility in terms of national and foreign content levels.
The new guidelines will now allow up to 45% foreign content if there is a Spanish interest in the transaction.
“This notwithstanding, with prior consultation with the ministry of trade, we can analyse any transaction, however limited the Spanish content, provided we can argue its Spanish interest,” explains Carmen Vara, head of unit, medium and long term, at Cesce.
To win Cesce support, issues to consider would include the level of Spanish visibility of the project, for instance, if the main contractor or winner of project tender were a Spanish company. Other areas would be the importance of the foreign market for Spanish companies.
Vara remarks: “The key word now is flexibility and openness to analyse any financing structures that promote Spanish interests abroad.”
As well as providing insurance cover to Spanish banks, Cesce also provides support for investors through its investment insurance programme.
This programme is particularly useful in regions where increasingly projects are being financed through local banks.
For instance, North Africa is a strong market for Spanish exporters. In particular, Spanish expertise in desalination technology has been used over the years in Algeria.
The first project finance deal to close in Algeria with a local bank was signed in 2005. Spanish firms Abengoa, ACS and Sacyr Vallehermoso signed a US$110mn financing agreement with Banque Nationale d’Algerie to develop the Skikda desalination plant.
Rather than insuring the banks, Cesce provided insurance directly to the Spanish investors through its investment insurance.
Since this transaction, financing via local banks has now become a far more common method in this region.
Opportunities to support desalination plants in North Africa have continued into 2008. Vara remarks that there are a number tenders set to be awarded to Spanish companies, opening the possibility of Cesce involvement.
For example, last August a contract was signed to build a desalination plant in Fouka in Algeria. Spain’s Acciona Agua and Canadian firm Lavalin agreed to build the plant and operate it for 25 years.
The investment is around €133.8mn and will be financed 80% by Credit Populaire de Algerie (CPA) and 20% by a joint venture between Acciona, Lavalin and state-owned Algerian Energy Company (AEC).
Over the past year, Cesce has been involved a range of transactions in Latin America and North Africa. It has supported the export of off-road vehicles to Morocco, exports of transportation equipment to the Dominican Republic, investment in the petrochemicals sector in Chile and in the bio-ethanol sector in Mexico.
In terms of prospects for 2008, Vara imagines that if problems with liquidity in capital markets continue, more banks may turn to Cesce for insurance to increase their capacity, both regarding final buyers’s and exporters’s financing needs.
But as yet, the ill-effects have yet to completely trickle through. However, armed with their new flexible guidelines Cesce aims to support an increased flow of business in the coming year.