Pricing in Scandinavia is low. Banks have been working on incredibly tight margins for a number of years in a self-perpetuating cycle of undercutting that has led to a trade environment where many Nordic corporates expect low prices.
“Pricing is tough, we can see it coming down again following its rise during the financial crisis,” explains Patrik Zekkar, SEB’s head of trade finance and supply chain Sweden, to GTR. “On the other hand it is not dropping as fast as you might expect considering that the banks are well capitalised now.”
There was a hope amongst many bankers in Scandinavia that now that the world is starting to emerge from the crisis, pricing would reach more profitable levels.
Annika Wilhelmsson, head of corporate products at DnB Nor’s Sweden offices, notes: “I don’t think the current pricing is sustainable.”
But Wilhelmsson comments that occasionally selling at a very low margin is worthwhile if it means maintaining business with key clients: “There might be individual transactions where you gain your money for lower margins but we look at the entire customer relationship. Customer commitment is the gearing for the low prices.”
At Handelsbanken, one of the few Swedish banks not to have a rights issue as a result of the recession, the pricing war is also noted. “Competition is quite fierce and pricing is sometimes ridiculous,” says Oscar Prytz, head of trade and export finance, Stockholm.
One of the main factors that drive prices so low is down to the multinational corporations that the region boasts; as while they are relatively few, theirs are the tickets that every bank wants to see on its books.
“We have a small number of very large exporters and when they move, they approach all of the banks. When this happens, the banks draw big limits on the counterparties and go for the business, because that’s the business that everyone wants and it pushes the pricing down,” Prytz continues.
Calle Nyquist, head of trade finance, western region, at Swedbank, adds: “We did not want to put the pricing back down after the financial crisis but there are banks that will push for the business and we have very little choice.”
Low pricing does come with one relief for the banks, as Nyquist states: “It keeps the international banks away, this helps prevent the market becoming even more competitive.”
Some international banks are in the region, but instead of dropping prices down they leverage their international presence to attract business.
“We can add a lot of value as an international bank. For example, due to our representation in many local markets we are able to absorb corporate and cross-border risk which should be a competitive advantage,” says Fredrik Åker, vice-president Nordic structured trade finance at Crédit Agricole’s Stockholm office.
While low margins are a significant problem facing Nordic banks, many have been helped by export credit agencies (ECAs), which have ramped up their offering to maintain trade flows through risk-sharing with banks that have a reduced appetite.
However, increased offering means that agencies’ roles have changed during the financial crisis and a number of new products and services have been created to deal with the new position they found themselves in.
Denmark’s ECA EKF, for example, began a number of new initiatives including a reinsurance scheme to prop up the trade credit insurance market. The agency also now has a team dedicated to devising new products to help clients.
At Sweden’s EKN, working capital guarantees were introduced for the first time as a product available to large corporates to help ease the loss of liquidity. Originally, the product was only due to be available through 2009, but once it was withdrawn a number of corporates asked the export credit agency to reconsider and EKN agreed to provide working capital guarantees for the first half of 2010 too.
The product is off the market for large corporates now, though it does still exist for Sweden’s small and medium-sized enterprise segment, as it has done for the last 10 years.
“We saw a big demand and that we could make a difference to these large corporates because the banks were hesitant to lend money. With working capital guarantees from EKN, the banks were willing to do longer terms and for bigger amounts. However, we withdrew it because during normal market conditions it is not needed for large corporates,” says Karin Apelman, director general of EKN.
Good for banks
The effect that increased exposure for ECAs has on the banking sector in the Nordics is, at the moment, entirely positive.
Jan Vassard, deputy chief executive officer at EFK, notes: “We’ve seen a revival of public export credits during the crisis and given the limited capacity of banks, I think this role of public ECAs will be stronger and on a more permanent basis for as long as we can see. We must be careful judging from short-term numbers but one can see this as a definite scenario.”
“It’s difficult to get even a large international bank to take on a small self-risk on a corporate outside the OECD countries. I’m not talking about buyers which are second rate, but really major corporates.”
Banks in the region have welcomed ECA collaboration and look to continue drawing on agencies for loan guarantees.
“We are working well with the ECAs in all four Nordic countries,” says Claus Stehr, head of trade and project finance and cash management sales at Nordea.
“We have a very strong relationship with ECAs in Denmark, Sweden, Norway and Finland and we are using them to a large extent. ECAs are very much our preferred risk sharing partner for us from the outset.”
Denmark’s Danske Bank praises the relationship that the bank has with ECAs across Northern Europe.
“We have a fantastic relationship with them. They are flexible and interested in finding new solutions,” says Henrik Schriver, first vice-president in the trade and export finance department at the bank.
The smaller banks in the region are also reliant on ECA backing to serve their clients, as Emil Menke, head of trade finance at Denmark’s Jyske Bank, remarks:”We have some countries that we don’t want to take risk in, so we call the ECA and they are very willing to talk about taking risk participation. We use ECA cover for Africa and the Middle East. It also depends on the length of the loan: above three years and we will consider going to EKF.”
Concerns for banks
But the story isn’t as trouble-free as it seems. The ECAs in the Nordic region have been called upon during the financial crisis to come up with new and innovative initiatives which may encroach on banks’ business lines.
“Trade will not stop just because banks have lost their appetite and the need for finance for large infrastructure and capital goods projects will not go away,” remarks Vassard at Denmark’s EKF.
“At the top of the financial crisis, we saw banks withdrawing from medium to long-term export credits and we saw credit insurance companies withdrawing rather dramatically from trade finance cover,” Vassard continues.
“Pure cover is what most ECAs are using as instruments as opposed to direct loans, but when we see banks withdrawing, there’ll be a need for funding.
“Add to this the likely consequences of the new Basel III measures. ECAs and their governments will be wondering; ‘do we have to establish a direct lending arm?’ and I think that will be the next challenge for export credit agencies. ECAs might get a much more central role in the years to come.”
Finnish Export Credit has been running a temporary funding scheme since 2009 and has just had its term increased to June 2011, which provides Finnvera and state treasury-backed direct loans to businesses, as Topi Vesteri, executive vice-president at Finnvera, explains: “During the financial crisis we very quickly realised that there was a shortage of financing so we set up the temporary funding scheme. Banks are still hesitant to commit their balance sheets for tenors exceeding five to seven years, and this temporary scheme can help address this.”
However, Vesteri believes there may be some stumbling blocks along the way: “The current international regulation can’t handle direct loans from ECAs and it must be revised to take into account the special features of a direct loan.”
“Otherwise, we’ll see a period where some public ECAs lend in a market that is more or less unregulated and is in an unfair competition with pure cover. There are big changes and challenges ahead for ECAs.”
With aspirations such as those that Vassard mentions, banks might be concerned that a new state-backed competitor could be entering the funding market on a long-term basis and muscling in on some core trade business.
True to EKF’s mandate of aiding Denmark’s exporters, Vassard believes that ECA direct funding will come as a result of banks pulling out of offering long-term loans in a post-Basel III era.
“At the moment, there isn’t a lack of funding for tenors up to five or seven years, but what is the risk and funding appetite if you go to 12 or 18 years? There’s a lack of appetite. What is the future role of banks in long-term export finance with new and tougher capital requirement measures coming into force?” Vassard says.
“There are temporary schemes at many ECAs and they are using these as a testing ground for what will come in the future,” he continues.
Finnvera’s Vestera notes: “Banks are hesitant to deal with long-term financing of capital goods; this is probably at least partly to do with the Basel III rules. What could possibly happen is that the new rules will mean that banks´ interest in capital goods related to medium and long-term buyer financing is likely to decrease and ECAs might have to fill the gap.”
Banks do not have to start worrying too much just yet, as take-up for both the EKF’s and Finnvera’s schemes has not been overwhelming. At EKF, with a total of US$3.75bn available, around half has been issued or is in the pipeline.
“We were expecting a little more take up on this, but this scheme is mainly for funding of very large projects and they have taken time to materialise during the crisis as sponsors, exporters, buyers and banks all have to make another round of scrutiny of these projects,” Vassard says.
Innovation is key
The combined pressure of low pricing and the temporary ECA funding initiatives that could become permanent has led to banks in the region becoming frontrunners of innovation to remain competitive and break the downward spiral of low pricing to attract customers.
“You can’t change a letter of credit, but you can think of new ways to benefit the client and make them choose your service,” says Swedbank’s Nyquist.
A number of banks have taken to turning away from software providers to use their own systems which they claim are vastly superior.
Danske Bank has a corporate IT interface called Business Online which offers full integration between offices. For example, a banker from the Denmark office who is visiting the Finland office can use the system there fully and immediately.
“Even with the very big corporate names in Northern Europe, the reviews that our Business Online system gets are that it is a brilliant system. It is an extremely well received in-house development and one of the key policies of the bank is to operate on one common IT platform,” says Schriver.
Another tech-based innovation to come from the region is SEB’s online community for trade finance professionals The Benche, which acts as a meeting place for individuals from corporates and financial institutions to discuss and share thoughts on international trade.
The first-of-its-kind platform was so successful that it expanded to include separate segments on cash management and custody issues.
“This is an initiative we started because we felt that the people in the trade finance business were isolated and needed somewhere to expand and get views from peers in the industry. This is an excellent way of going about that and it has developed tremendously well,” says Patrik Havander, head of concept and packaging GTS at SEB.
Other innovative practices include considering what additional products banks can offer their clients rather than concerning their credit committees by diving into the price war.
Prytz at Handelsbanken is embracing the possibility of change: “We have a dedicated development department now who look at new ways of handling structures and transactions. We’re looking at what the client’s needs are and how we can fit in a deal around them, rather than looking at a deal and working out how it can fit into a letter of credit.”
Other institutions are working hard to cut down processing times. At SEB for example, they have managed to shorten the time it takes between shipment and presentation of documents to just under 10 days from the previous average of 16 days, and they’re working on making it shorter.
Nordea is using its vast network to stay ahead of the game and is striving to be involved in a wide range of trade in the region.
“We are the only wholesale bank in the Nordic Region with a widespread network in all of the individual countries: Finland, Norway, Sweden and Denmark. Alongside this, and the strength of our capital base, we are involved in all industries that are doing import and export in the region,” says Stehr.
However, the ECAs in the region will continue putting forward products to support their country’s exporters and it may mean that they do enter the funding market and pricing may stay low, or get even lower, for a long time. Ultimately, to succeed in the increasingly competitive environment in the Nordics, the banks will have to use a combination of all of the innovations that they have been producing.