Building a deeper relationship

CFOs and treasurers in CEE face challenging conditions for the foreseeable future, not unlike their peers elsewhere in the world. By working with their banks to improve liquidity management and de-risk their balance sheets, companies in emerging Europe are ensuring that they are well positioned for every eventuality.

By Tibor Bodor, Head of Client Coverage CEE at ING Commercial Banking

 

The global economy and financial markets have created headwinds for corporate growth in emerging Europe. Many of the region’s exports go to the troubled eurozone, while regulatory reform and upheaval in the banking sector threaten to reduce companies’ access to capital. In response CFOs and treasurers in the region are focusing on two key priorities, according to research by ING.

"It's about having a deeper understanding of what really drives our clients"

The first is to improve liquidity management and working capital. The second is to identify opportunities for improved efficiency and to reduce risks, both operationally and on corporate balance sheets. In terms of liquidity management, many firms initially focused on rationalising their inventory before seeking to extend payment terms with suppliers. There has also been a drive to improve receivables management. Recently there has been an increase in interest for more sophisticated working capital and trade finance solutions, including supply chain finance and factoring. Solutions such as these have been popular in other emerging markets, most notably in Asia, for many years. However, their adoption in emerging Europe has been delayed for a number of reasons. The fragmented regional banking market serves as one explanation. State-owned banks have continued to make their balance sheets available, regardless of market conditions. Similarly, a number of banks competing in the region are not subject to Basel requirements, enabling them to make funds available at a lower cost than banks headquartered in Western Europe, for example. Secondly, many corporates have, until recently, been unfamiliar with more sophisticated financing solutions. For example, it takes time to understand why the internal reorganisation required for factoring is worthwhile. A high degree of customisation is necessary to accommodate local legal structures and requirements, even for banks that offer supply chain finance or factoring in markets outside of emerging Europe. Not all banks have been willing to make these investments.

 

De-risking corporates

Chief financial officers’ second most important priority is de-risking their balance sheets. Treasurers and CFOs alike are scrutinising the banks they work with. Over the past year some international banks have exited the region while others have scaled down lending and retrenched capital. Since many companies in the region have sound balance sheets, few financial executives have found themselves facing an immediate problem. However, there are genuine concerns about which banks will continue to provide funding and services in the coming years. Fast-growing companies in particular are worried about continued access to capital. The topic of bank lending is especially pertinent because the majority of corporates in the region are reliant on bank debt. Moreover, most large enterprises receive the largest portion of their funding from international banks, making them vulnerable to further retrenchment. Such companies are now considering alternative funding sources.

The syndicated loan market has largely dried up and international capital markets are currently accessible only to the largest firms in the region. However, some anticipate that international investors will view sovereign and corporate debt in Central & Eastern Europe (CEE) as an opportunity to seek the higher yields available there. While banks may have little appetite for 10-year lending, pension funds and other investors have long-term liabilities that must be matched.

Furthermore, pressure to generate yields is likely to spur a revision of investment policies. This change is being driven by the realisation that many countries in the region that are rated below investment grade might offer greater risk-adjusted returns than, for example, investment grade Spain. CEE’s weighted average debt-to-GDP ratio is 47% compared to 83% for Western Europe.

As a result, a number of emerging European corporates are now preparing IFRS accounts in order to access private placement and money market fund investors for the first time. ING has used its Eurobond platform to enable borrowers from Turkey, Poland and elsewhere to bring new issuances to the market. A recent beneficiary is Czech railway operator České Dráhy, which raised EUR 300 million at 4.125% in July last year. De-risking balance sheets also means identifying opportunities to unlock cash. For example, corporates are increasingly considering sale and leaseback arrangements to unlock real estate assets.

Similarly, there is increasing interest in identifying risks that were previously ignored, such as pension liabilities, and hedging volatile commodities like grain, oil and diesel. In order to respond to the needs of financial executives, some banks that are active in emerging Europe are changing how they serve the region. ING has adopted a new client-focused approach that complements its strategy in the rest of Europe. For banks willing to commit to a long-term future in emerging Europe, there is a need for more than just lending. They must adopt a relationship-focused approach that showcases their capabilities, knowledge and people in order to win more business. Historically, banks in the region have taken a product-oriented approach that has failed to deliver cohesive solutions and has resulted in treasurers and CFOs spending disproportionate amounts of time on managing meetings with banks.

An alternative approach tasks bank product teams from a variety of areas with explaining the advantages and disadvantages of various options to finance chiefs in an unbiased way. This approach to relationships can prompt banks to focus on clients that are the best fit for their capabilities. Both banks and corporates stand to gain if banks re-evaluate how they serve clients in emerging Europe. For banks, understanding clients’ needs and business models helps them win additional business and create a more sustainable business model. For corporates, an increased understanding of their business means they receive better service while no longer having to meet with multiple product specialists. Perhaps most importantly, such an approach can enable the region’s companies to access the sophisticated solutions they require as they expand both regionally and internationally.