Where others cannot reach – Deutsche Bank

July 2018

How can the export credit community attract a wider group of exporters – and build expertise for tomorrow? Simplification, cooperation and digitalisation were just some of the answers discussed by panellists at TXF Global 2018: Export & Agency Finance in Prague

Having notched up 12 episodes of the TXF Export finance podcasts discussing the challenges and opportunities within export and agency finance, TXF’s ‘resident’ experts Simon Sayer (Deutsche Bank), Gabriel Buck (GKB Ventures) and Simon Jones (TD Securities), moderated by TXF Managing Director Dan Sheriff continued the conversation as part of the TXF Prague conference agenda.

They were joined by export credit agencies EKN (Sweden) and Euler Hermes (Germany) to look more closely at what the future holds for this specialist but transformational form of lending.

This article summarises the main points made by the panellists and also provides links through to the TXF podcast collection, as well as a video of the session.

The panel

Panel
Left to right: Anna Karin Jatko (EKN); Simon Sayer (Deutsche Bank); Thomas Baum (Euler Hermes); Gabriel Buck (GKB Ventures); Simon Jones (TD Securities)

Anna-Karin Jatko, Director General, EKN
Simon Sayer, Managing Director, Global Head of STEF, Deutsche Bank
Thomas Baum, Head of Division Underwriting & Risk Management, Euler Hermes
Gabriel Buck, Managing Director, GKB Ventures LTD
Simon Jones, Head of Export & Agency Finance, EMEA, TD Securities

Moderator: Dan Sheriff, Managing Director, TXF

Dan Sheriff: In preparation for this panel, each speaker identified a goal they would like the industry to achieve over the next five years, and will be leading the discussion on this. We will then invite delegates to vote on progress the industry has made so far on each of these and review progress at this event in one year’s time.

Attraction of new exporters

Thomas Baum: The Euler Hermes goal is to become more relevant in the industry, to reach more exporters and share of the global trade as an export credit agency. In 2009, 75,000 companies exported. Euler Hermes has fewer than 1,000 clients. It’s not just about SMEs, but it is about relevance to other sectors, services and new structures. We need to make the client base broader and get our mandate over to other players in the market. We are a complex institution and sometimes young companies feel they cannot maintain the expertise in their team to deal with us. We want to be simple, fast and nice.

Simon Jones: The quickest way to get SMEs involved in ECA financing is through the supply chain, where they don’t have to fully appreciate and understand the financial implications or how to get export credits involved in their sales. Some ECAs offer a shopping list product where you say you will provide finance as long as you buy, for example, in the UK. For some of these multibillion dollar projects, the supply chain is massive but the individual companies are small and so are the contracts. I remember looking at a project for a billion dollars where there were more than 3,000 suppliers from the UK, each contract was very small. It was all primed through an EPC contractor but what it was doing behind the scenes was giving access to ECA finance to very small companies in the supply chain

Gabriel Buck: The real question is about relevance. If you look at the statistics of how much business is done by exporters, you said that 20 exporters accounted for 50% of the volume. If that concentration risk gets more concentrated over time then the relevance of what we do becomes less important. You can’t have all this capability providing support for 20 exporters. We need to reach a wider group of exporters. The average age of exporting company is 18 years. The knowledge and IP in the banking market about doing transactions across the globe is immense. But the issue is how do we reach out to the SMEs and make it more profitable. An SME does not have a six [month] to one year gestation period on a project but two or three weeks.

Thomas Baum: Let’s move away from SMEs as they have very specific needs. There are providers of services in Germany, healthcare, transportation. When they come to us we hear they cannot convince their own management because we are set up for manufacturing. Howe can we discuss the content of software development when most of the work has been done in India but there is a German company selling the intellectual property and know how? We start the discussion and then they say “it is not for us”.

Simon Sayer: Is it an eligible tactic to go direct to the buyers and borrowers to increase your customer base Thomas?

Thomas Baum: Yes we have opened the Dubai desk, and we have switched focus more to the importers and it is a good idea to find exporters in the books of the importers.

Anna Karin Jatko: We are keen on exploring how we get more sourcing from Sweden, how to approach large contractors, and how to have better working reinsurance between ECAs so we can jointly ensure exports grow. I have 400 clients in a small economy. If we are asking ourselves whether we are relevant I dread to think what our clients might be thinking! We need to be a lot more flexible, approachable – and faster.

Audience poll: How good a job is the export finance industry doing attracting new exporters?

Response: 39/100

Panel
Thomas Baum of Euler Hermes raises the issue of content origination

Attraction of new talent

Dan Sheriff: How is the industry doing in attracting new talent? Simon is going to lead the discussion of attracting the export finance experts of tomorrow

Simon Sayer: Let me start off by reading a generic job description for an associate in structured trade and export finance – not based on one at Deutsche Bank or any specific bank!

“The STEF department arranges medium and long term cross-border finance of the bank’s global clients in support of the acquisition of capital goods, equipment, infrastructure and associated goods and services. The team is responsible for origination, structuring, execution and negotiation of the new business.  It works to an annual budget against clear parameters and KPIs. Relevant industry sectors: Oil and gas (upstream and downstream); power, including renewables telecoms metals and mining; large movable asset such as aircraft, ships and trains; construction of infrastructure ranging from hospitals, new universities, airports, large-scale water  or waste management facilities. Typical deal sizes are tens of millions of dollars, hundreds of millions and frequently billions. The projects are in the real economy, often developmental and projects provide much needed infrastructure in developing countries and invariably have a positive impact on the people and societies in which they are needed. Borrowers can sometimes be highly sophisticated clients in developed countries. As this is an international business you may be expected to travel.”

By way of example last year my team travelled to 40 different countries ranging from Argentina to Zambia with countries ranging from US$700 per capita GDP to US$24,900 per capital (that was Qatar). Doesn’t this sound fantastic? My proposition is that the business does not have a problem attracting new talent. Recruiting into export finance is about finding the right candidates for the jobs you are trying to fill. I receive applications all the time to join my team. But, new talent does want to make progress, have real content in their roles and some of those things don’t come quickly enough. 

Gabriel Buck: The issue for young people is they are looking to make an impact and be in a market that has flow. “Millennials” are not interested in travelling over weekends and what may be attractive to us is not for them. Entering a business where the average is 40+ has a negative association for them, and because they don’t see a long-term career its dead man’s shoes. We make a loan with a guarantee very complicated with archaic rules and regulations so that a young person looking at this for the first time thinks is madness. If they join an investment or commercial bank, and if they look at other products and services, they see they have a longer term sustainable career with flow, simplicity and income — and not having to travel all the time. I think we need to change our business model to attract them.

Anna Karin Jatko: I think millennials are very values driven. You should start off with the CSR aspects of export finance and tell them they can change the world and that we can give you the tools. But we do need to simplify the tools. If they have to read a manual for three months you have lost them.

Thomas Baum: Simon’s job description is a perfect description. We need to work hard on the retention of talent. Getting the right people in the door is easier but retaining them is a huge task.

Simon Sayer: It is also about seeing a developmental opportunity. While it is a loan with a guarantee, when people scratch the surface it is a very complex business but that is what makes people stick around.

Gabriel Buck: They don’t want to be involved in a transaction that takes five years to close. It’s too long. If, on average, looking at the statistics suggests that banks are doing ten deals a year with teams of 20 or more people, they will not feel they are making an impact.  I know a lot of people that are working for SMEs, on renewable energy projects, and for the corporates that will make the impact rather than the financiers.

Simon Jones: There are plenty of millennials who do or are happy to live with the time lag. I asked a relatively new TD Securities employee what their thoughts were on being associated with the export credit business and choosing this a career. “Social responsibility and positive impact on the world” was the first thing they said.

Gabriel Buck: Oil and gas is the biggest part of our market.

Simon Jones: Oil, gas and mining support developing economies

Audience poll: Is the export finance industry doing a decent job at attracting new talent?

Response: 34/100

Progress on digitalisation

Daniel Sheriff: The next topic on our list is the progress towards digitalisation. Anna – can you kick us off?

Ann Karin Jatko: We need to be simplifying and digitalisation is the way forward. We all want to increase our business and we are seeing an increase in demand for supplier credits in small tickets by larger companies, in services, and in anything short term. There are business opportunities that require simplification through digitalisation and we want to increase profitability, especially when working with small tickets. You need to reduce processing time, transaction costs and improve client satisfaction. Those three ingredients normally increase profits.

As for digitalisation, there are a lot of new technologies within our industry such as blockchain and machine learning that will help us simplify. This will help us retain the millennials who are very digital. In addition, digitalisation is the answer to a lot of KYC issues but we need to be smarter and more collaborative in how we use it.

Simon Sayer: What are you ECAs doing to lower the barriers to entry around digitalisation and KYC? I do feel that banks have been in the front line on KYC…

Thomas Baum: Your question asks what are we doing in practice? The IT systems are not fit for digitalisation, nor are the processes. We are trying to lower the bar to get millennials and people with iPads to apply for cover. But this is not enough, and my vision is to have a fully digitalised processes. A political mandated agency with a lot of procedures behind the scenes is hard to digitalise. We need to find ways and we have not found it yet.

Gabriel Buck: Each ECA could have web pages explaining the level of cover with pricing, what the application processes would be, documentation for loan or supplier credit what the guarantee would look like. You could have panel lawyers to do the documentation. One agency will have a good model for premium calculation, another very benign information for country exposure and appetite. The market of what an ECA can do for exporters is hardly understood. It is about making sure the communication is clear and unambiguous.

Anna Karin Jatko: We hope you like our web pages, as we have done this!. We are trying to improve our customer access but there is a lot of work left to be done. I appreciate KYC is tough for banks but it is also tough for us. Yes, you have shareholders, but we have a lot of media scrutiny and CSR questions about why a government entity has supported a certain project.

Dan Sheriff: Do you think if export finance streamlined the process, would this lead to more efficiency or job losses?

Simon Jones: There will be more processes will be digitalised, and export finance will follow the market. Everything is moving in that direction. I don’t know how long this will take.

Simon Sayer: I believe in globalisation and this has been poorly marketed and reported to the world. What we have started to see with the increase in protectionism is that it is not very helpful.Digitalisation would deliver a process with less friction and more jobs.

Audience poll: How are we doing with digitalisation?

Response: 22/100

Engagement with investors

Dan Sheriff: And now we come to our final ‘goal’ (to use World Cup language). Should we be doing more with investors?

Simon Jones: Engagement with third party investors will continue but it will remain fragmented as it is at the moment. Factors in the past few years have been because of QE in Europe and US, amounts of excess liquidity in the market, access to many fragmented liquidity schemes.  Before the crisis not many banks were thinking about third party investors for export credit apart from standard distribution of their ECA loans. A range of solutions have come about because of gradual changes of market environment and now we have a complex array of third party liquidity involvement, where we access institutional investors not normally involved in export credit. You also have covered bond programmes successfully distributing export credit in Spain, France and, primarily, Germany.

Gabriel Buck: The biggest barrier is the lack of transparency. Greater transparency equals greater accountability. Greater accountability gives greater confidence. Greater confidence will allow third party players to come in to ECA asset class knowing they can come out. Right now there is no secondary open review of these assets. Where you have an asset class where third party investors are willing to come in and out and your have the secondary market trading of these assets then you start to create HQLA [high quality liquid assets] status for these assets. Once you have got that it’s a game changer for everyone.

Simon Sayer: I don’t agree. There are plenty of institutional investors brave enough to come in to the market and actually already have. We have seen capital market issuance in the market already. Investors are queuing up to buy the assets if we can make them available. Necessity is the mother of invention in this market and right now there is not a great necessity as we know what is happening on pricing. The single barrier is not transparency but economics. Even if banks had invested time getting this product suitable for capital market investors, and some of us have, if the economics are not right we are not going to pull the trigger.

Gabriel Buck: What you are saying is that banks are booking these assets at a price which is lower in yield than fixed income investors would be willing to take that asset. If you are booking assets on a long-term basis where there isn’t a secondary market clearing price where you can sell that asset and not having to mark to market a loss at the time of sale? This is not is healthy for the industry as a whole. If all the banks are booking assets which are sub-market, this is why the ECAs are having to come in with their direct lending programmes

Dan Sheriff: On the ECA side, is engaging with alternative liquidity high on the priority list?

Thomas Baum: It’s not high on the priority list. The need is not what it was a few years ago. We need something we know with skin in the game. We love having banks as our policyholders as we have worked with them a long time and trust their execution capabilities. Of course we are looking at bond cover transactions – we don’t want German exporters to be at a disadvantage if we are too conservative.  

Simon Sayer: Institutions and pension funds will not go into emerging markets on a clean basis. Hedge funds will, but not pension funds. They need wrappers.

Anna Karin Jatko: While we might think everything wills the same with negative yields and surplus equity, economic recessions do come and go. I was in Argentina a few months ago and capital just left overnight…

Simon Jones: Big capital markets issues have happened but unless you have continual supply coming through you will not get the attention of investors. If you only drip it in when banks have a problem, forget it.

Audience poll: How successful has the industry been in engaging with institutional investors?

Response: 32/100

Dan Sheriff: Given all the scores from the audience polls, there is a lot of room for improvement, which we can review next year! Thanks to all the panellists for their insights.

Simon Sayer
Simon Sayer (Deutsche Bank)

The TXF Export Finance Podcast

You can catch up on the other 12 podcasts and follow the team by visiting https://txfmedia.podbean.com/

A video of this panel discussion held at TXF Global 2018: Export & Agency Finance in Prague can be found at
https://www.youtube.com/watch?v=NxvqBWpoqf8&feature=youtu.be

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