“When meeting colleagues from other parts of the world, it seems as if pricing in Northern Europe, and within Scandinavia, is extremely competitive,” remarks Henrik Schriver, first vice-president, trade and export finance, at Danske Bank in Denmark.
Danske Bank is the largest bank in Denmark, and a key player in the northern European region, but it still heeds the growing level of competition in the market.
With the banking market in Denmark relatively crowded, corporates do not necessarily remain loyal to one particular bank, but often hold out for the best deal available.
Schriver elaborates: “We do see an increasing number of companies putting their trade finance business up for tender among their core banks.”
Flemming Lippert, head of trade and export finance at DnB Nord in Denmark, further comments: “Many of the corporates in Denmark are used to having more than one bank as their house bank. They often spread their business out according to the credit lines available.”
DnB Nord is one of Denmark’s new faces in the banking world, with the bank only setting up operations in 2006, as a joint venture between DnB Nor and Norddeutsche Landesbank Girozentrale (NordLB).
Yet, although corporates have been able to pick and chose which bank to work with, the implications of the credit crunch may change the nature of their relationship with the banks.
Nordic banks have escaped the brunt of the crunch, but with global liquidity tightening, bankers have remarked that their lending rates have increased as much as 75 basis points in recent months.
The general aim of both the newcomers and more established players is now to win over corporates, not solely by offering cheap financing, but through being able to efficiently manage various strands of their business.As Lippert remarks: “Part of our strategy is not only to win the trade finance business of a company, but to also organise their cash management and treasury operations. It is not enough just to supply a loan to a company, but we are also looking to gain other forms of business.”
Automating trade finance
IT innovation is one way banks can capture more trade business.
“Accessibility is also becoming more and more important and again we believe that state-of-the-art IT is a key driver,” comments Danske’s Schriver.
Over the last year, the bank has been developing its three-year-old web-based IT-interface for corporate customers called business online.
The system provides real-time information to Danske customers on all trade finance products. According to Schriver, over 75% of the bank’s total trade finance volume is now conducted through the online facility.
Over at DnB Nor Bank, Lippert adds that the bank has also established an online internet bank facility which will handle all the cash management and trade finance facilities in the same spot.
“It has proven to be very popular, especially for trade finance customers with large volumes of business who can transfer these volumes to the bank,” he remarks.
Financing renewables in Nicaragua
Although DnB Nord is a newcomer to the bank, it has been able to draw on the strength of its parent companies, and its global network of correspondent banks. This has enabled it to close some interesting transactions, helping Danish exporters move into more unusual markets.
In January the bank signed a US$56mn deal to support the export of wind turbines, blades and accessories for the construction of a wind farm consisting of 19 wind mills in Nicaragua. The deal was structured as a standby letter of credit, issued by Central American Bank for Economic Integration (Cabei), and financed via a club loan arranged by DnB Nord, with parent banks DnB Nor and Nord/LB acting as participants.
The Latin American market has much potential, according to Lippert, and the region still promises more favourable pricing than presently being seen in Asia, in particular China.
“I see risk pricing in Asia remaining low for a substantial number of years. Considering the risks involved for instance in South America there seems to be a higher risk margin compared to the Chinese market.”
However, Lippert adds that the Asian markets still hold promise.
In China, he has found that the business environment has been improving, making it far easier to deal with Chinese banking authorities and navigate the sometimes tricky legal waters. And, although India lags behind in offering a more conducive business climate, he expects the country will inevitably follow the example of China in the near future.
He also highlights Vietnam as a region of interest, but as yet the bank has not been involved in any transactions within the country.
According to official statistics, Danish exports to China grew by 40% in 2007, with the equivalent of €1.6bn-worth of goods being exported to the country. In comparison, there has been minimum trade with Vietnam, with only around €100mn-worth of exports recorded in 2007.
Tapping into the ECA market
Offering export credit agency (ECA)-backed financing is another possible tactic to win over corporates.
Typically the market for ECA-backed business is relatively small in Denmark, as one banker remarks: “In a year there are probably only 10-15 transactions that are really worth going for.”
There has also been a general feeling that the relatively liquid Danish corporates are more and more willing to accept risk, without turning to an ECA for assistance.
However, given the squeeze on global liquidity, the prospect of ECA financing may be about to become far more attractive.
As evidence of the appeal of the market, DnB Nord is looking to finalise one of its first ECA-backed deals.
As GTR goes to press, the deal has not yet closed, but it involves the financing of exports to a cement plant in Brazil. DnB Nor is bidding for the transaction, offering to arrange the US$25mn deal, including the handling withholding tax issues. The proposed offer is expected to be arranged in conjunction with the Danish ECA EKF and the request for financing originated from a Brazilian bank.
Economic forecasts further stoke the argument that Danish corporates could start turning to ECA-backed financings to help make their exports more competitive.
According to an economic report published by SEB Bank in February, Danish exports are set to gradually lose their momentum. Measured in current prices, exports increased by only 2.5% in 2007, compared to a 9% growth in 2006.
This decline is partly due to dwindling demand in western European markets. Exports outside the eurozone are also being damaged by continuing currency appreciation, with the krone strengthening by 3% in 2007.
Not only are Danish exports potentially losing their competitive edge, the banks that would usually finance this business are facing higher funding costs as well as higher and more realistic risk spreads, thus making ECA financing, which can help mitigate and spread the risks, more attractive.
Jan Vassard, deputy managing director at EKF, observes: “We have seen a growing demand for cover in the CIS and Eastern Europe. We explain this development by a combination of strong economic growth and increased risk perception in the market.”
According to EKF’s annual report, the CIS and Eastern Europe region has increased its share of EKF’s guarantee exposure growing from 11% in 2006, to 18% of the portfolio in 2007.
Russia is the largest market in this region where there has been growing demand in the cement sector.
Turkey is relatively new but growing market for EKF. The near and Middle East region, including Turkey, accounts for 14% of EKF’s guarantee exposure, and this is mainly driven by demand in the Turkish wind energy sector.
Vassard adds that official export credit agencies like EKF will most probably have to fill some of the “capacity gap” in export financing left by private financial institutions.
However, as yet, this is mainly speculation as the ECA has not noticed any significant change in overall demand, apart from some increase in SME transactions. “We are of the impression that this might be a sign of growing reluctance among banks to issue loans without an ECA guarantee,” Vassard suggests.
EKF’s new focus
The Danish ECA is expecting further demand for cover due to a reorganisation of its operations. EKF has taken over the Danish investment guarantee scheme from the ministry of foreign affairs. It has revised its terms and pricing, and has begun a marketing drive to promote the product to its customers.
“We have already detected a larger interest in the scheme and expect a growing demand for cover – especially in relation to investments in African countries,” Vassard notes.
Africa is presently the agency’s smallest region, only accounting for 6% of its guarantee exposure in 2007. This actually marks a decline in exposure, falling from 8% share in 2006.
EKF is also in the process of formulating a new business strategy, and is looking to expanding into new sectors such as renewable energy, green technology, food processing and infrastructure.
During 2007 Norway’s economy was in relatively good shape, with the mainland economy growing by over 5.5%, according to SEB Bank’s research
However, in line with its Scandinavian neighbours, the effects of globalisation have inevitably meant Norwegian exports are often at a price disadvantage compared to emerging countries. SEB’s research suggests that demand from abroad will slow sharply during 2008, and that the growth of traditional merchandise exports will slow from 7% in 2007, to 2% this year.
The export markets in Norway have remained fairly traditional, with the dominant sectors being fish exports and oil.
“Norway’s exporters are heavily involved in the export of ship equipment, especially in Asia,” the senior vice-president of project and trade finance at DnB Nor in Norway further notes.
When drawing a comparison with its neighbour in Sweden, Borghild Holen, senior vice-president and head of international section at DnB Nor, observes that Swedish exporters are more involved in the export of capital goods for infrastructure projects.
“Norway’s exporters tend to deal more with clients in OECD countries and regions with a higher degree of creditworthiness,” she comments.
Yet, Norway is seeing some increase in trade with emerging markets, with Chile being a prime example. Norwegian-Chilean trade increased by 21% over the last year, with the fish sector, energy and some infrastructure being the main drivers of this growth.
The Chilean market’s potential has attracted the attention of a number of players with a Norwegian delegation headed by the Crown Prince Haakon making an official visit to the country in January to encourage bilateral trade. The group also included representation from Norway’s ECA Giek.
DnB Nor is also opening up an office in Chile, with operations due to start in September.
Just as the sectors being financed in Norway remain traditional, so too do the means of financing them, with letters of credit being the more popular choices, among a number of methods available via DnB Nor.
However Borghild notes there is a growing tendency to opt for credit insurance as opposed to letters of credit among Norwegian corporates.
The extent of the downturn
Across the Nordic region, there has been an increase in the use of credit insurance, and this could in part be put down to the changing risk perceptions across the region.
Jorgen Lund Lavesen, commercial director – Atradius Northern Europe, including the Netherlands and Nordic countries, observes trends in demand for credit insurance: “After a few years of low claims, the perception of risk has been relatively low with people questioning whether they really need trade credit insurance.
“This is now changing, we see clouds in the sky, and so do our customers.”
He notes that there have been signs of a rising number of defaults in the market, which began in late 2007 and have continued into this year.
Up until recent times, pricing on insurance in the region had been plummeting, reflecting the previously benign market conditions.
However, Lavesen observes that renewal policies are now either being taken out at a higher price or sometimes at the same level.
Another phenomenon that is further pushing up the cost of trade credit insurance is the impact of capital funds investing in companies, making themselves extremely leveraged on these firms.
“Their financing is highly reliant on trade creditors, and this means they put a lot of pressure on these firms to make payments. This is resulting in a toughening up on payment terms and pricing being driven up,” explains Lavesen.
However, on a more positive note, EKF’s Vassard notes that from his perspective as yet there are no signs of an increase in claims.
According to EKF’s annual report 2007, there were no major claims in the whole year, and just one potential claim. Since 2002 new claims have been minimal, and EKF has not noted any major claims since the Argentine crisis in 2001-02.