the 2012 guide to commercial banking in - home€¦ · leadership succession against a backdrop of...

The 2012 guide to

Commercial Banking in Central & Eastern Europe

April 2012

ContEnts

Introduction 4

The revival of the convergence story 6

Redefining a partnership for CEE 11

CEE knowledge and structured finance strength 16

Metals and mining 17

CEE agriculture flourishes despite challenges 20

CEE lending remains robust 23

Spotting opportunities in challenging times 26

FX hedging to the fore 28

This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

Euromoney Institutional Investor PLCNestor House, Playhouse Yard, London EC4V 5EXTelephone: +44 20 7779 8888 Facsimile: +44 20 7779 8739 / 8345

Chairman: Padraic FallonDirectors: Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Gary Mueller, Diane Alfano, Mike Carroll, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan

Editor: Sarah Minns Printed in the United Kingdom by: Wyndeham, Roche, UK

© Euromoney Institutional Investor PLC London 2012. Euromoney is registered as a trademark in the United States and the United Kingdom.

4 The 2012 guide to CommErCial Banking in CEntral & EastErn EuropE

The 2012 guide to CommErCial Banking in CEntral & EastErn EuropE

W elcome to the ING Guide to central and eastern Europe (CEE). The articles that follow this

introduction provide a useful insight into the region, its macro-economic outlook and some of its key sectors. We also consider financing conditions for CEE companies, address the cash management and treasury priorities of the region’s companies and outline ING’s broad and deep capabilities across CEE.

Last year was difficult for the region and it underperformed compared to other emerging and developed markets. The outlook for 2012 is somewhat better, though it comes with some important caveats.

Given its close economic and financial connections with the eurozone, CEE’s prospects in the coming year depend to a great extent on a resolution of the eurozone’s problems. If the eurozone makes headway in addressing its challenges, then CEE will automatically benefit significantly.

This dependence on developments elsewhere is reinforced by much of the region’s reliance on exports (most notably to Germany, which accounts for up to 30% of exports from the Czech Republic, Hungary and Poland). It cannot be immune to external problems. However, it is better placed to manage challenges than many other regions, including much

of the eurozone, for a number of reasons.

Firstly, CEE companies are resilient: as a rapidly-developing region, economic and financial conditions have been changeable over the 20 years during which regional economies have been opened up. As a result, companies have learned that self-sufficiency and preparedness count for a lot when handling external shocks. CEE companies are also accustomed to adapting to changed conditions rapidly and taking opportunities when they are available – by refinancing when credit is available, for example.

Secondly, similar lessons have also been learned by many governments across CEE. While there are notable challenges – both politically and economically – the region continues to move towards investment grade status and its average debt-to-GDP ratio is just a third of western Europe’s. The benefits of preparedness can be seen by the example of Turkey, where the pick-up since 2009 has been quicker than in other countries, and in Poland, which was the only country in Europe to avoid recession in the aftermath of the 2008 financial crisis.

CEE’s strength can clearly be seen in the two sectors that we focus on in this Guide – metals and mining and agriculture. (These sectors are two highlighted areas where ING provides a full range of structured finance solutions in CEE over a wider range of sectors).

introduction

5The 2012 guide to CommErCial Banking in CEntral & EastErn EuropE


CEE includes some of the world’s important metals and mining countries – most obviously Russia but also Ukraine and Kazakhstan. As with other companies in the region, metals and mining firms have adapted to the unsettled macro-economic and financial environment. They restarted their investment programmes cautiously following the 2008 and 2009 financial crisis and consequently were not caught out by volatile commodity prices and difficult financing conditions.

Similarly, the agricultural sector – a huge part of the region’s economy – is an area where CEE is a globally important source of agricultural commodities, including grain, wheat, corn, barley, vegetable oil and sugar. While the nature and sources of financing are changing, credit has continued to flow given the enormous potential of the sector. Agricultural yields have improved significantly since the early 1990s but remain below international averages while there is still plenty of productive land available.

The broader corporate market continues to be adequately served by bank lending, although – just as in metals and mining

and agriculture – there has been a shake-up in terms of the banks and structures involved. Given changes in the banking market, lending is now more closely linked to the provision of payments and cash management and financial markets services, including foreign exchange, commodity and interest rate hedging.

ING was one of the first banks to arrive in CEE and has remained their constant presence in the region even during years of crisis and uncertainty. Now ING is embarking on a new chapter of its CEE history with an approach that targets its capital towards those clients that are prepared to build a broader relationship with the bank – a relationship that is complementary for both parties.

ING wants to work with clients that recognize the bank’s expertise – inside and outside CEE – across a wide variety of products, such as capital markets and M&A advisory. In return, ING wants to deepen its understanding of its clients’ businesses so that we can make proactive suggestions that benefit them. The future success as a bank in CEE is dependent on helping the corporate clients achieve their strategic goals.



Emerging European assets had a tough 2011 and as a result underperformed, compared to other emerging and developed

markets. The turmoil in the eurozone escalated last year with some cracks evident in the European Union project and political risks taking over from economic issues. Indeed, with so much focus on the eurozone, the broader EU group has seen a split, with the new emerging European members searching for an anchor.

The good news is that Germany, emerging Europe’s main trading partner, is growing. The situation stands in contrast to the 5% GDP drop suffered by Germany in 2009. In addition, German inventories have fallen since early 2009, which not only provides a healthier base-effect but also offers relief for countries like Poland and the Czech Republic (as their inventory build-up can also be consumed by the main German export market).

At the same time, corporates globally hold record cash levels (something reflected in deposits at Turkish banks, for example,

due to the sizeable spread received on US dollar or euro deposits) while there is a generally higher level of preparedness, given that the last crisis was just a few years ago. The hope now is that slowly improving sentiment and real data will convince corporates to start investing the redundant cash in the second half of 2012, providing for the next stage of recovery.

politics is the greater challenge The recovery in emerging European assets so far this year again shows the reliance on eurozone liquidity injections to counterbalance the negativity caused by the eurozone woes. A challenging but reasonable assumption is that eurozone countries will continue to move towards a more coherent policy, helping economies and assets in the region to remain on a recovery path, albeit at differing speeds.

While the economic picture in emerging Europe should become clearer in 2012, there is greater concern about the political fall-out from the only gradual progress in addressing the eurozone’s crisis. This can be seen in the limbo situation with

the revival of the convergence storyEmerging Europe continues to be driven by events in the neighbouring Eurozone. Fortunately, the region’s most important trading partner, Germany, is not only growing but is also spearheading the drive to keep the EU project on track. This provides a necessary anchor to help revive the ‘convergence’ process, writes Simon Quijano-Evans, EMEA chief economist at ING



regard to eurozone convergence – an idea originally pitched to new EU members as one of the most important advantages of EU membership.

The lack of directional impulses from the core, and the economic weaknesses have, for example, been partly reflected in events in Hungary, which began more than a year ago when pension funds started to be nationalized. More recently, a stalling in the convergence story has also been accompanied by a pick-up in discontent among the electorates in Bulgaria and Romania. Spillover effects are also seen in non-EU countries such as Ukraine, where the balance between EU/US and Russian politics plays a role.

And, while focus has remained on the eurozone debt crises, there has been a halt to EU accession talks with Turkey, reflecting a challenging EU foreign policy. Indeed, the freezing of accession talks has led to Turkey formulating its own new foreign policy, addressing crucial issues such as the Middle East (to which

it exports around 20% of its goods and which is probably responsible for a large part of the $13 billion net errors and omissions in the balance of payments).

Meanwhile, domestic politics remains a challenge in Russia and Kazakhstan, with the former still in the process of finding its position within the context of an ever-more informed ‘global’ electorate and the latter facing questions on future leadership succession against a backdrop of an evolving democracy. While both countries can continue to rely on energy revenues, policy reform is underway, especially in Russia, to secure net capital inflows to fuel infrastructure spending and higher growth rates, and allow the state to maintain its substantial non-energy budget deficit, which reached 10% of GDP in 2011.

What is driving growth? Although the emerging Europe 2012 growth story is a far cry from the experience in 2009, it will also continue to be driven by exposure to the FX loan

2009 2012 INGFKaz

akhs .

Turk

eyRuss

iaPo

land US

Bulgar

iaRom

ania

Czech

R.

Hungary

Euro

zone

Croat

ia

8

6

4

2

0

- 2

- 4

- 6

- 8

% Real GDP Growth

Source: NatStat agencies, ING



legacy. This year’s bank lending growth in individual countries is essentially a function of how much FX lending had been done in the past and how much consequent winding-down remains to be done. With 70-90% of banking sector assets in many emerging European countries in foreign hands, the other issue is how prepared banks will be to continue lending.

So far, news about this issue has been restricted to Austria issuing guidelines for the exposure of its banks. Although there has been speculation about banks pulling out of some markets completely and individual authorities preparing contingency measures (such as the National Bank of Poland offering loans to potential buyers), asset sell-offs have not materialized. More importantly, the European Central Bank’s two Long-Term Refinancing Operation (LTRO) programmes provide much-needed relief that will help reduce worries about large-scale deleveraging.

The baseline scenario is therefore a continued stagnation of loan books in those countries that have greater

foreign bank and FX loan exposure, making them more dependent on export growth. In Russia it is more the corporate sector that will have to deal with any deleveraging effects, given the substantial exposure to the syndicated loan market (the largest part of syndicated loans in the region is taken up by Russian corporates/banks).

Export dependence will be the second major determinant of growth. The most open economies are exposed to any eurozone slowdown, with Germany (which accounts for up to 30% of exports from the Czech Republic, Hungary and Poland) being the most important partner to focus on. Indeed, assuming constructive growth spillover from Germany is sustained in 2012, expectations of a further pick-up in Germany and some other eurozone countries in 2013 should ensure that they save the day for those countries closest to the eurozone group.

Looking further afield, trade patterns in Turkey show a falling reliability on trade with the eurozone bloc as it diversifies towards Latin America

The two vulnerabilities

Source: Central Banks, NatStat agencies

Simon Quijano-Evans, EMEA chief economist, ING



and/or Asia. Turkish exports to the EU15 countries fell from 47% of total exports in 2007 to 39% in 2011 – both as a result of the eurozone’s economic woes and the political messages being sent to the country.

the impact on emerging Europe FX Emerging European currencies have borne the brunt of the eurozone’s spillover for a number of reasons that will remain important in 2012. Firstly, regional currencies are being driven by volatility and changes in euro/US dollar, which are in turn a function of the eurozone decision-making process. Secondly, any individual regional events such as Hungarian policy issues not only impact the national currency but also spill over into peers such as the more liquid Polish zloty.

A third factor that emerging European FX will focus on is high non-resident positioning – especially in Hungarian and Polish domestic government bonds – coupled with ongoing concerns about fiscal issues, with the Polish zloty for example burdened towards the end of 2011 by the risk of the legally-binding 55%/GDP debt limit being breached.

Strained access to eurozone bank lending would also see increased local currency borrowing to fund external debt repayments (particularly in Russia and Ukraine) putting local currencies and money markets under pressure at times.

Looking ahead, central bank policy has not become any easier, especially given the huge flows of liquidity into the more solid fiscal stories in the region such as Turkey. And, while eurozone developments will remain a short-term driver of FX performance, later in 2012, regional central banks could also be confronted with a pick-up in food prices, given the low base effect from a bumper harvest year in 2011 and signs of harvest stress appearing in some countries like Ukraine.

However, the ECB’s liquidity injections have been a major game-changer, providing for relief at all levels. The developments of the past 18 months have shown how intertwined western and eastern Europe have become. Emerging Europe has shown that it is able to cope with increased stress from the neighbouring eurozone although the recovery experience will be quite diverse.

600

500

400

300

200

100

AAA AA+ AA AA- A+ BBB+BBB BBB- BB+ BBA A-

UKGermany

NetherlandsFrance

Belgium

Czech RepublicPoland

Slovakia

Russia

Italy

Spain

IrelandHungary

Romania

Turkey

28 March 2012

Avg Ratings of Moody’s/ S&P

5yr m

id C

DS

in b

p

Ratings convergence will continue

Source: Bloomberg, ratings agencies, ING



ING was one of the first banks to arrive in central and eastern Europe (CEE) in 1991. It has remained a constant presence in the region in the two decades since then, including during years of crisis and uncertainty. Unlike some of ING’s international competitors, which left during hard times (such as 2008 and 2009) and conceded that CEE was not a core strategic focus, ING has continued to invest and reaped the rewards as the region has bounced back quicker than western Europe.

Now ING is changing: it is re-sizing and re-focusing its business, including splitting off its insurance business. ING will remain an international bank with core markets in the Netherlands and Belgium (reflecting its origins) as well as CEE and Germany. ING is committed to maintaining and expanding its CEE network and strengthening its capability further. However, as part of this renewed commitment it is adopting a more specific approach towards clients.

Given the characteristics of CEE, lending, cash management and FX are core

components of any client relationship in the region and ING has a comprehensive track record of meeting its clients’ needs in these areas. ING can leverage its operations across the region to make it easier for clients to gain assistance wherever they need it. The bank’s regional continuity makes integration and control throughout Europe straightforward and certain.

the new approach Historically, CEE has been overbanked and consequently clients have been well serviced. Now many banks operating in the region are moving towards Basel III compliance – albeit at a different pace – while others are not. Depending on their model and home countries, banks are facing different funding issues.

As a result, markets are being disrupted and clients are faced with large variations in pricing and approach, which can be confusing. As in 2008 and 2009, some international banks are reducing operations or exiting countries while some banks are primarily focused on lending and others on transactions services.

redefining a partnership for CEEIn these dynamic times, ING remains as committed as ever to CEE and is changing its model to deepen and broaden its relationship with its clients so that it can deliver greater value and assist them achieve their goals, writes Mark Milders, head of corporate clients central and eastern Europe at ING



To compete in CEE, a bank has to be able to offer lending, cash management and FX at a price that is attractive. Client research shows that clients appreciate ING’s steady commitment to the region and its approach to client service. To ensure that its capital is targeted at the most appropriate clients, ING focuses on client relationships that are complementary for both parties. In CEE, ING does not want to be everything to everyone.

ING intends to work with clients that recognize the bank’s expertise – inside and outside the region – across a wide variety of products, such as capital markets, M&A advisory and supply chain finance, and the strength of its international network. Gaining such business is not a requirement to access lending or cash management: ING would never expect a client to select anything other than the best provider and it believes firmly that a relationship cannot be defined by a contract. However, a complementary relationship should mean that ING is always on the short-list for a product or service where it has a competitive solution.

For its side of the bargain, ING is pledging to do more for clients and, through tireless ingenuity and being the best provider, to win a greater range of client business. ING is not interested in market share just for the sake of it and does not want to work with clients that have a spreadsheet mentality and believe banks are inter-changeable. Instead, it wants to build a deeper relationship that helps clients achieve their strategic goals.

addressing clients’ needs As part of its more specific approach to client relationships, ING has begun contacting corporate treasurers and

CFOs across its CEE network, which is comprised of universal banking in Poland, Romania and Turkey and commercial banking business (excluding retail or SME offerings) in the rest of the region, to discuss the most important themes for their business in 2012 and 2013.

ING then works through corporate treasurers’ and CFOs’ priorities using its product scope, which identifies possible options for the client and how ING can facilitate them. What is crucial for the treasurer or CFO it that this exercise is proactive on the part of ING and, properly implemented, has the potential to benefit their business.

By making treasurers and CFOs aware of opportunities they might not have previously considered, ING looks to assist its clients in realizing their ambitions so that it can win further business. Moreover,

Mark Milders, head of corporate clients central and eastern Europe, ING



ING knows that the key to winning business is not just offering products and services that are competitive in terms of price and quality – that is a prerequisite – but in showing that the bank understands the client’s needs and business model and acts upon that by offering relevant solutions.

By making a detailed operational analysis of a company – for instance surveying, the procure-to-pay or order-to-cash cycle – ING is able to offer much more than just a generic working capital solution. Instead, ING is able to suggest specific changes that will improve efficiency, increase cash flow and reduce the need for lending. Necessarily, this proactive approach requires investment on ING’s part. That is why ING is focusing on relationships that are the best match with what the bank has to offer. ING believes this approach

will deliver results for both parties – which is the foundation of a good relationship.

To date, ING’s client approach, which leaves a light footprint on the client, has won strong support among clients. Most companies in CEE are run by entrepreneurs who delight in explaining how their business works and are eager to gain insights into how a banking solution could help them operate more effectively.

CEE priorities Among the themes that have been identified by clients during ING’s research among treasurers and CFOs is the importance of mapping risks effectively. ING’s client solutions group can help clients develop hedging strategies for commodities, FX or interest rates or for management of pension liabilities. This assistance can be as sophisticated

HQ ING Commercial Banking in Amsterdam



or simple as the client requires: ING can provide direction on accounting for hedging transactions and general education on the use of hedging, for example.

Treasurers and CFOs have also highlighted the forthcoming wave of loan maturities in 2013 and 2014 as a pivotal issue needing to be addressed. While financing conditions are challenging, by proactively addressing the situation – with the assistance of ING – it may be possible to refinance early to ensure certainty of cost-effective funding.

More generally, treasurers and CFOs who responded to ING’s survey said that long-standing issues, such as optimising inventory levels or considering the merits of a receivables programme remain important. Liquidity management,

improving the cash conversion cycle, reducing trapped cash in the operating cycle and ensuring effective pooling to reduce outstanding borrowing and reduce costs similarly rank highly in the survey.

Overall, the focus of treasurers and CFOs is on initiatives to improve efficiency and reduce working capital facilities. Interestingly, the emphasis is not just on treasury efficiency but also on operational efficiency – reflecting the wider role of the treasury in the post-crisis era and the fact that the finance function is now equally important as strategy and sales functions in many companies.

a tailored response ING’s approach to addressing the themes raised by treasurers and CFOs in CEE is straightforward: it analyses the risks and then sets out whether or



not it is worthwhile – from a cost and operational risk perspective – to address them. Should it be worthwhile, ING’s full product platform – encompassing equities, bonds, hedging and other products – is at clients’ disposal.

What is central to ING’s approach to addressing clients’ needs is that it recognizes that all companies – and their finance functions – are different: a cookie-cutter approach simply cannot deliver the best results. The hallmarks of ING’s approach are equally clear: transparency is always the goal and any solution should fit around the client’s operations: finance should never interfere with business.

Despite the setback caused by the financial crisis, CEE is well positioned. It continues to move towards investment

grade and its average debt-to-GDP ratio is just a third of western Europe’s. Given the growing sophistication of its companies, they will increasingly access capital markets and will be able to extend their borrowing maturities. International expansion is also on many corporates’ agendas.

ING’s emphasis is on transparency in every aspect of its relationship with a client: it aims to simplify documentation, accessibility and communication. Banks face numerous challenges in the coming years given market conditions and regulatory change. However, ING will ensure that its chosen clients remain insulated from the consequences of these challenges to as great an extent as possible. ING’s commitment to the region – and to its relationship with its clients – remains formidable.



CEE knowledge and structured finance strengthStrong capabilities in both CEE and structured finance mean that ING is well positioned to support clients, writes Michiel de Haan, head of structured finance, CEE at ING

ING is a leading bank in CEE with a track record that spans more than 20 years. It is also a top 10 player in global structured finance, which is a specialized lending business focused on cash flow or asset-based financing structures in sectors like power, oil and gas, infrastructure, telecom and media, transportation, mining, trade and commodity finance, and acquisition finance.

ING’s combination of local knowledge in CEE markets and an on-the-ground presence with international structuring capabilities make it uniquely positioned to be able to offer clients in CEE cost-effective and innovative structured financing: ING is offering a core product in a core market.

The sectors focused on in the two chapters of the Guide that follow – on metals and mining and agriculture – were chosen because of their central importance to the CEE economy and the CEE’s global importance in those sectors. Both metals and mining and agriculture have also remained strong during the financial and economic turbulence of recent years.

Throughout the CEE, telecoms and media, oil and gas, and the power sector have demonstrated a high level of resilience to the economic slowdown. ING expects a high level of activity in the fields of

renewable and conventional power as well as infrastructure and a renewed deal flow driven by private equity investments.

The availability of structured finance solutions is becoming increasingly scarce as many banks’ capacity to lend is curtailed by regulatory reforms such as Basel III that compel them to hold more capital. However, having a structured finance capability and appetite alone is not enough to meet the needs of CEE companies. In order to provide cost-effective financing solutions, a bank needs a deep understanding of a client’s business, sector and region matched with a proven reputation for structuring and a creative approach to solutions: that is what ING delivers in CEE.

Michiel de Haan, head of structured finance, CEE, ING



Companies in the metals and mining sector in CEE, which is dominated by Russia but with globally crucial production in Ukraine, Kazakhstan and elsewhere, restored their investment programmes cautiously following the 2008 and 2009 financial crisis. That caution proved well-judged given the turbulence experienced both in commodity prices and the availability of financing since the recovery began.

The overall dynamics of the sector seem to remain positive. Having spent much of the post-crisis period restructuring their debt, steel majors in Russia are now seeking to acquire upstream assets to strengthen their vertical integration: most recently, MMK has successfully acquired Australia’s Flinders, giving it access to high-quality iron ore. Meanwhile, Severstal has completed the spin-off of its gold operations and is known to be considering a listing of the unit.

Elsewhere in the region, consolidation of the steel industry continues in Ukraine with the country’s largest steel and mining group, Metinvest, acquiring a 50% stake in the Industrial Group, which controls the fifth biggest

steelmaker, Zaporizhstal. This move follows Metinvest’s acquisition – and successful integration – of Ilyich Iron and Steel Works, Ukraine’s second largest steelmaking company. These recent deals put Metinvest in the ranks of the top 25 largest steelmakers and 10 biggest iron ore miners in the world.

Meanwhile, in Kazakhstan both Kazakhmys, the country’s largest copper producer, and ENRC (which is 26% owned by Kazakhmys) have been active in terms of acquisitions, driving the consolidation of the domestic market and also expanding the geographical reach of both companies further into Africa.

a year of two halves Financing conditions for the metals and mining sector in CEE – indeed globally for almost all sectors – changed noticeably between the first and second half of 2011. During the first half of the year, there was stable growth in both demand for lending and availability of lending as the industry continued its recovery from the 2008-09 crisis. With plenty of liquidity chasing a limited supply of quality assets, borrowers were in an improved position characterized by margins and structures that were more acceptable to them in

metals and miningFinancing conditions have become tougher since the second half of 2011 and prices have risen. However, companies in the metals and mining sector are well positioned to weather any difficulties and underlying conditions in the industry remain strong, writes Momchil Ivanov, head of metals, structured metals and energy finance at ING



comparison to the preceding two-year period.

Then, in the second half of 2011, everything changed as the eurozone crisis escalated and engulfed the banking sector. The liquidity of European banks in particular was heavily impacted by concerns about the eurozone, with some banks having difficulty accessing US dollars. As a result, those banks became selective in their lending activities. At the same time, the impending increase in capital requirements necessitated by Basel III began to affect lending activity. Overall, there was a decline in activity by European banks.

To some extent, US and Asian banks have filled the financing gap caused by the partial withdrawal of some European banks. Certainly, there has been a significant shift in the geographical

distribution of banks that lend to the metals and mining sectors in CEE. However, the increased activity of US and Asian banks has not been sufficient to prevent an increase in pricing. Indeed, some deals have had to be restructured and re-priced following the withdrawal of European banks and their replacement with banks from other regions.

The predicament faced by the European banking sector appears to be easing to some degree: US money market funds are beginning to increase their exposure to European banks. The European Central Bank’s Long-Term Refinancing Operation (LTRO) has injected some much-needed liquidity into the banking sector and alleviated pressure. Moreover, many banks’ measures to meet Basel III are already well advanced and therefore are unlikely to result in any further restriction of credit to improve capital levels.



Fortunately, regardless of whether European banks come back to the metals and mining sector in CEE, borrowers are currently well positioned. Most have been proactive in managing their balance sheets and are therefore comfortable in terms of their financing needs. A clear outcome of this comfortable position can be that an increase in pricing will remain limited in the foreseeable future.

ing’s metals and mining strength ING has a well-deserved reputation in the metals and mining sector in CEE, having supported many of the leading companies from the region since their inception in the early 1990s: few banks can claim 20 years of experience in structured metals financing in CEE. As a result, ING has a deep understanding of the operating models of the region’s companies and their needs.

Moreover, throughout its long history of activity in CEE, ING has built up knowledge of the sector and created capabilities that rival any bank in the world. Using its network of local offices, ING offers comprehensive relationship coverage on the ground. This is combined with teams offering global capabilities in equity capital markets, debt capital markets and mergers and acquisitions advisory, which have an excellent track record in serving the metals and mining sector.

ING’s strength across products like lending, structured finance and corporate finance in metals and mining in CEE fits perfectly with the bank’s new approach to working with clients on a relationship basis – taking a holistic view

of their needs – rather than focusing on individual product offerings. ING’s event finance team, based in Amsterdam, coordinates all product activity so clients get the right solution for their specific requirements. This approach also better reflects the changing needs of the sector, following widespread restructurings in recent years.

ING’s long track record serving companies in the metals and mining sector in CEE stands out thanks to the fact that the bank stands by its clients throughout the cycle – regardless of commodity price volatility or liquidity problems in the banking sector – and provides not just products and services but guidance and advice on balance sheet structuring and hedging that are only possible as a result of a deep and long-term relationship.

Momchil Ivanov, head of metals, structured met-als and energy finance, ING



The agricultural sector in central and eastern Europe (CEE) is a vital part of the regional economy and one of the most important sources of agricultural commodities – including grain, wheat, corn, barley, vegetable oil and sugar – in the world. Indeed, the Black Sea region is the largest free trade area in the world for grain with Kazakhstan, Russia and Ukraine producing surplus grain and North Africa, especially Egypt, being a massive importer of grain.

The strength of the agricultural sector of CEE has been built over a long time. In the post-Soviet period, agriculture suffered from lack of investment and organization: even Ukraine –known as the breadbasket of Europe – was unable to function adequately in the immediate post-Soviet era. However, in the intervening years, the agricultural sector has reinvented itself.

During both 2010 and 2011 the sector has been strong, although in both years there have been challenges. For example, during 2010 Russian exports were restricted by the government following a poor harvest (and consequent high prices that encouraged producers to export as much as possible).

liquidity problems impact sector All crops in CEE enjoyed a good harvest in 2011, but agricultural firms faced a tougher time gaining access to funding. Liquidity problems in the banking market – in particular European banks’ inability to access dollar funding given concerns about the eurozone crisis – meant that borrowing costs rose for agricultural companies in 2011.

Meanwhile, there was almost no IPO activity given the turbulent state of stock markets, while volatility in the bond market also reduced access for agricultural companies. Fortunately, Russian state-owned banks – prompted by the government which has prioritised improvements in the agriculture sector – have stepped into the breach, providing access to credit not only in Russia but also in Ukraine and elsewhere.

Across the region, the role played by the European Bank for Reconstruction and Development, the International Finance Corporation and the European Investment Bank has increased significantly. At the same time, offtakers and buyers have aided

CEE agriculture flourishes despite challengesWhile gaining access to funding has become more difficult, the agricultural sector in central and eastern Europe continues to attract investment and is becoming increasingly efficient, writes Pieternel Boogaard, head of agricultural finance, central and eastern Europe, at ING Structured Finance



producers by changing payment term structures: they no longer pay late but instead pre-pay.

Continued strength in the sector Overall, credit has continued to flow sufficiently to allow investment in agriculture to continue across CEE. The explanation for this is straightforward; despite difficult times in the international financial markets, CEE agriculture business continues to show enormous potential. Yields have improved explicitly in recent years but remain below international averages. In addition, there is still plenty of land available for production.

While it remains impossible for international companies to own land directly in Russia and Ukraine, it can be leased instead. Moreover, there are huge opportunities in the provision of silos (which provide access to grain supplies), crushing plants, sugar plants and logistical capabilities. As a result, foreign investment – notably from Asia

– continues to enter CEE.

At the same time, consolidation among national and regional players is accelerating. Russia, which has long lagged other countries in the region, is finally beginning to consolidate its top exporters and producers. As a result, larger players are emerging that could change the dynamics of the business. Russian companies are expanding into Ukraine, for example, while Kazakh companies are moving into Russia. Kazakh companies, long hampered by logistical problems when selling globally, are also expanding their regional sales. Ukrainian companies – eager to avoid the high funding costs (due to elevated credit risk) associated with companies operating solely in Ukraine – are also diversifying geographically.

What ing offers Having been long-focused on pre-export financing, ING has also recently expanded into capital expenditure



financing for agriculture companies and short-term local working capital financing (repaid from local sales).

ING focuses on the top five players in each sector in Russia, Ukraine and Kazakhstan. It offers a strong combination of structuring capacity and network breadth across CEE. While some banks have multiple department pitching different products, ING puts the client first and considers their needs before delivering a coordinated offering. ING’s flexibility is important given the challenges of financing agriculture in CEE.

ING’s use of local staff in Russia, Ukraine and Kazakhstan to structure and originate its financial solutions means that it really understand the companies it works with, their business models and the dynamics of the domestic agriculture market: the industry is changing rapidly and without an on-the-ground presence it can be difficult to keep up-to-date. The knowledge gained by a local presence benefits ING from a risk management and commercial perspective and benefits clients because ING’s deeper understanding of the market shows it is willing to offer financing solutions that would otherwise not be available. Moreover, unlike some international banks, ING does not simply re-label existing products from other sectors for use in agriculture: the bank appreciates the unique characteristics of the sector.

ING’s client model, which aims to deepen and broaden its relationship with its chosen clients so that it can deliver greater value and better help them achieve their goals, fits perfectly with the bank’s agriculture offering. In

addition to its lending and structuring strength in the sector, ING has a proven track record in agriculture corporate finance, including IPOs and mergers and acquisitions advisory. Moreover, when ING provides dollar loans it is necessarily well positioned to cross-sell FX and interest rate hedging – benefitting both the client and ING.

Pieternel Boogaard, head of agricultural finance, central and eastern Europe, ING

Liquidity problems in the banking market … meant that borrowing costs rose for agricultural companies in 2011”



CEE lending remains robustThe corporate lending market in central and eastern Europe remains healthy but is undergoing change. Radim Cmiel, head of central and eastern Europe corporate lending at ING, explains what is driving that change and why relationship lending is set to become more important for corporates

Most of the central and eastern Europe (CEE) lending market is dominated by banks with foreign owners. Similarly, due to a relatively low level of deposits to fund assets in the majority of countries – with the Czech Republic the most notable exception – there is some dependency on cross-border funding of loan assets. Despite these shared characteristics, the CEE market is far from homogenous.

Each national market has different dynamics with, for instance, Turkey and Russia, experiencing the strongest loan growth in the region on the back of GDP growth. Equally, the characteristics of each market vary. Corporate lending in Russia and Ukraine tends to be dollar-based, for example, which can make it challenging for some European banks that are unable to access dollars easily. Meanwhile, most other markets in the region are focused on local currency lending.

resilient corporates and lenders Companies in CEE are generally resilient by necessity: having been through multiple crises in the past they are adaptable and have learned to handle external shocks well.

During the crisis in 2008 and 2009, there was considerable concern that CEE corporates would be severely affected. To be sure, CEE was not able to remain aloof from the global credit crunch and some companies which – before the crisis – had high capital expenditure, high leverage and relied on short-term financing, faced some serious challenges.

However, overall CEE companies fared quite well, have subsequently deleveraged and are now better prepared for future economic difficulties or scarcity of credit. Many companies also successfully refinanced in 2010 and early 2011, when a number of banks were trying to boost market share by offering lending at attractive rates. Some borrowers, especially those from Russia, have turned to the bond market as an alternative source of funds, reducing their dependence on bank lending.

Meanwhile, despite concerns of a spillover effect from the crisis, most banks remained in CEE, although they did become more cautious in their lending. Moreover, the inherent attractiveness of the market has been emphasized by the replacement of those banks leaving the



market with increased presence of other banks, in particular Russian state-owned banks, in the corporate lending market – and they operate not only in Russia and Ukraine but increasingly elsewhere in central Europe.

More recently – as some European banks have been forced to scale back their lending activity due to capital constraints, impending regulatory change, the need to deleverage and difficulties in accessing dollar funding – US and Japanese banks have increased their activity in CEE. Some are becoming more active in the syndicated loan market and are also buying up secondary loans.

Changed lending characteristics The resilience of most of the existing banks and the entry of new banks into the CEE lending market have ensured that credit remains available for companies deemed to be good credit risks. Moreover, while margins have gone up overall, reference interest rates have

fallen since 2009 so total borrowing costs have not risen dramatically. At the same time, the characteristics of both bilateral and syndicated loans have changed.

Given the constraints in the funding markets, banks are now more careful regarding the currencies of the loans they grant in CEE and also differentiate more clearly between currencies in terms of costs. When a borrower may want to borrow only in dollars, a bank may offer a club loan with euro and dollar tranches with different lenders participating in each of those tranches: the freedom to borrow in any currency of choice with no impact in terms of cost is a thing of the past.

Generally, banks are becoming more careful about the optionality they offer borrowers, including for example the approach to liquidity back-up lines – largely prompted by the impending introduction of Basel III, which will raise capital requirements for banks and introduce a leverage ratio and stricter liquidity and funding requirements.

relationships to the fore While some new players have come into the CEE syndicated loan market, the changing characteristics of the market have elevated relationship lending in importance. For banks, lending to long-standing customers is straightforward: the bank understands the customers business and credit profile and has the ability to cross-sell, which is increasingly important for banks’ revenues, return on capital. Being in the position of relationship lending affects the willingness to lend at times of uncertainty or credit scarcity as well. But for borrowers, relationship lending

Radim Cmiel, head of central and eastern Europe corporate lending, ING



also makes good sense. It delivers greater predictability and stability, either in terms of certainty of funds or in acceptance of possible modified requirements by the borrower. As a result, most recent syndicated corporate deals have been predominantly bank clubs composed of relationship banks..

ING is committed to CEE – with its broad operations across the region, its willingness and capacity to lend, and its track record and capital investment in the region. The bank is seeking to strengthen its core client relationships and seize existing opportunities in the market. ING expects lending to be mutually beneficial: in return for dependable lending, it expects to be part of a partnership of long-term cooperation that includes non-lending business.

When ING commits to lend to a client, it expects to become – over time – a core bank and reciprocates by taking the time to really understand the client and its sector so that it can become a trusted advisor. ING is also eager to leverage its international network, both in CEE and also globally. Given that companies are increasingly part of international operating groups – and there is also a growing number of CEE-based companies, such as Russian firms, expanding within the region – working with a bank spanning different geographies makes sense. ING is keen to find ways for clients to take advantage of the synergies and common approach of its banking relationship across multiple markets.

the outlook on lending in CEE Inevitably, the outlook for CEE lending will be determined to a large extent by developments in the eurozone, given that

most international banks that operate in the region have European parents. The ECB’s support of the banking sector in December 2011 with the Long-Term Refinancing Operation (LTRO) – followed up by a second wave of lending in late February 2012 – has boosted liquidity and relieved pressure on rates, spreads and swaps which led to benefits for the lending markets.

Following the successful completion of the second bailout for Greece in February 2012, a modicum of stability has settled on the region. However, should a default in the eurozone occur – as many fear remains likely – then contagion could easily affect CEE. Equally, GDP growth in the eurozone is important as most economies in CEE are open and rely on exports to the eurozone. If recession engulfs the eurozone, demand for CEE’s exports will necessarily dry up.

The good news is that while corporate lending in most CEE countries is dominated by international banks, those that have strong local deposit bases have continued to be active in the market. To a large extent they are not reflecting in their CEE corporate lending the cost of funds or restrictions faced by their parent banks. Some of these banks are even lending at more attractive rates than their parent banks.

The reason for this is the regulatory restrictions on the movement of liquidity between markets – regulators are increasingly focused on deployment of local deposits – and so have effectively saddled some banks with trapped cash locally. These banks have naturally taken the view that it is better to put this cash to work in the lending market than seek alternative investments.



spotting opportunities in challenging timesThe unsettled backdrop and the necessity of improving working capital management when credit is scarce are accelerating moves towards centralization and improved efficiency, writes Andre Rijs, regional head of payments and cash management at ING

For international companies, payments and cash management (PCM) is usually managed on a regional basis, with central and eastern Europe (CEE) addressed separately to western Europe. Nevertheless, the most important PCM themes for treasurers and corporate treasurers are the same in both regions – and the same across the world: corporates remain focused on centralisation of their cash management and payments functions.

In the period since the financial crisis began, credit has become scarcer and changes in capital requirements for banks, such as Basel III, are likely to ensure this continues. As a result, corporates have looked internally to find cash. Improving working capital by unlocking trapped cash is a core focus for treasurers and CFOs in CEE.

a competitive market PCM for multinationals in CEE is dominated by international banks. Domestic and regional banks usually serve small and medium-sized companies at a local level, although some multinationals that chose to operate in only one market may also decide to work with local banks. Generally most international companies will have a pan-regional approach and therefore working

with a pan-regional partner bank – that can deliver harmonisation and integration of products and channels – makes sense.

Within the region, ING competes directly with leading global PCM banks for most common payments and cash management services, including corporate card solutions across the region. And ING offers access to all local clearing facilities. In markets where ING provides universal banking, such as Poland, Romania and Turkey, ING’s business is typically 50% international companies and 50% local corporates; elsewhere in the region around 70% of the bank’s business comes from multinationals.

Apart from its strong product offering and talented people, a large element of ING’s reputation in CEE is derived from its long history in the region, which began in the early 1990s. While some international banks have deserted CEE – in some cases on more than one occasion – when crises have occurred, ING has remained steadfast. Clients appreciate ING’s commitment – both to CEE generally and their relationship specifically – and the fact that its approach is not opportunistic.

ING’s on-the-ground presence and track



record across the region means it is not only well positioned to help clients achieve their goals but can offer genuine insight into the region and its characteristics. For example, the bank’s longstanding relationship with local regulators and tax authorities can be advantageous in understanding the sometimes complex tax arrangements of some countries.

meeting clients’ needs The key to effective PCM across CEE is standardisation. That means for instance fast and flexible internet banking service ING Online, which supports secure online banking for payments and cash management services.

ING’s commitment to uniformity and standardisation extends to connectivity: just one document is required to gain access to SWIFTNet across the region. ING also offers a standardised customer support service. Besides the local expertise there is an advisory team based in Amsterdam that has specialist knowledge and can offer advice on local issues and market developments across CEE. The standardised approach of the support team is extended to other product areas: ING does not have a silo mentality and advice is available across a wide range of flow products, including trade and payments.

stability comes first The uncertain economic and financial environment means that customers have increasingly reconsidered their banking relationships: counterparty risk is now a board-level concern. Concerns about counterparties are focused not only on the safety of deposits but also on operational risk, whereas companies need to understand the implications for their

payments and cash management were a bank to withdraw from the market.

These concerns are not just theoretical: Greek banks, for example, play an important role in the Bulgarian market and concerns about whether they will be able to continue to play that role given Greece’s domestic crisis have resulted in many customers seeking alternative providers. More generally, many companies are considering alternative solutions from banks that have clearly stated their commitment to the region.

While many companies are reacting to the uncertain backdrop, they are also proactively looking for opportunities presented by the turmoil. For example, many companies have accelerated centralisation initiatives to decrease complexity, increase efficiency and lower bank charges. Meanwhile, the introduction of SEPA in Europe is helping to fuel the adoption of standards across CEE, with an emphasis on eliminating paper-based processes, increasing efficiency and improving transparency.

Andre Rijs, regional head of payments and cash management, ING



FX hedging to the foreCorporates’ use of hedging – most notably of FX – has risen markedly since the financial crisis began. While regulatory change looks set to significantly increase hedging costs, the adoption of new market practices could ensure than that it remains affordable, writes Arek Szperna, head of financial markets sales for CEE at ING

For corporate clients active in CEE – whether they are local or international firms – there are three principal risks they must manage: foreign exchange risk; commodity risk; and interest rate risk. Of the three, FX risk is by far the most important. With the exception of Slovakia (which is a member of the eurozone) and the countries with a currency peg, most countries in the region have free-floating exchange rates creating the risk for companies to have huge FX exposure.

The scale of that FX exposure has been vividly displayed in recent years. During 2008 and 2009, the Polish zloty weakened by up to 50% in just six months. More recently, in 2011 the Hungarian forint lost up to 20% of its value in five months. Such huge swings are not beneficial for anyone. However weak, a local currency can create opportunity for some companies: for those that manufacture in the region and distribute elsewhere, such a decline in costs can be a boon. On the other side, for international companies distributing products or services in the region, devaluation on such a scale can rapidly price them out of the market.

Before 2008, many corporates were reluctant to hedge long-term FX risk

because the economic backdrop was relatively stable and there were few negative consequences of failing to hedge. Since the onset of the financial crisis, awareness of FX risk has necessarily grown – CFOs and treasurers rapidly increased their knowledge as volatility spiked – and therefore demand for longer-term hedging solutions has risen.

local presence is crucial The market for hedging corporate FX risk is dominated by local and regional banks, according to central bank statistics from across CEE. For international banks without an onshore presence it is more difficult to develop the relationships needed to win business: generally FX and risk management business are awarded to banks willing to make their balance sheet available to clients.

In addition, given the complexity and diversity of local markets in CEE it is difficult for banks without a local presence to develop the appropriate expertise or knowledge necessary to adequately address the dynamics of FX in the region and hedge risk accordingly. ING is well positioned in each local market and offers expertise, execution and research locally. It is also heavily



committed to supporting its clients and deepening its corporate relationships.

While a local presence remains essential, many companies are increasingly centralising their corporate treasury at a regional or global level. To reflect this, ING also operates global emerging markets FX desks in Amsterdam, Brussels and London to provide coverage at head office level: clients can access local know-how and still execute globally – which can prove to be more cost effective – should they wish to.

a new second risk factor While FX has undoubtedly become the most important risk factor facing CFOs and treasurers in the past three years, the significance of commodity risk has also increased over the same period: indeed commodity price risk has become sufficiently elevated to overtake interest rate risk as the second most important risk facing companies.

Large local companies in the natural resources sector, such as local refineries or gas distributors, are used to buying a product based on a price formula that differs from the formula used to set a selling price. Similarly, some companies may have a long lag between production and sales. Given commodity price volatility, such companies can face significant discrepancies in these prices. As a result, they have increasingly hedged the gap between their buying and selling price or tried to guarantee forward prices. At the same time, many logistics clients have reacted to the increase in diesel fuel prices by using commodity derivatives to hedge their exposure.

Interest rate hedging has historically been relatively unimportant to companies in CEE as most countries in the region have benefited from a downward movement of interest rates. Even as the cost of funding has fluctuated, it has been offset by this downward trend. Naturally CFOs and



treasurers are aware of interest rate risk, but it is not a primary concern: after all, a 50% movement in FX has a much greater effect on a company than a 100 basis point increase in interest rates.

the impact of regulatory change The torrent of forthcoming regulatory change – most notably Basel III – is set to have a significant impact on banks and will have major knock-on effects for corporates in all regions seeking to hedge FX, commodity risk or interest rate risk. Basel III is already impacting the pricing of derivatives to end-clients such as corporates as banks are considering the credit risk of the corporate client, expressed as a Credit Valuation Adjustment (CVA) and the market liquidity risk in order to more accurately allocate capital for potential negative valuation of the contract.

Historically, credit risk has not been fully reflected in derivatives pricing, which was

instead determined primarily by a bank’s ability to provide a particular hedge. Under Basel III, the rating of individual clients and the sector they operate in will have a major bearing on the price they pay to hedge their risks. For highly-rated companies, the expectation is that hedging costs will remain similar to those previously incurred. For lower-rated companies, which include many domestic companies in CEE, costs could increase considerably.

However, for such companies there is a way to mitigate the potential increase in hedging costs associated with CVA. Long-term hedging contracts are covered by the International Swaps and Derivatives Association documentation that includes a Credit Support Annex. This annex states that if a contract is negatively valued by the market then the client owes money to the bank (in compensation for the increase in credit risk): should a certain pre-agreed value be reached, collateral must be posted. The Credit Support Annex can work on a bilateral basis.

To date, the Credit Support Annex has been seldom used – most obviously because clients have not been aware of it and have never needed to consider its use. Among those companies that were aware of it, there has been a concern that the requirement to post collateral could trigger a liquidity problem. In many countries – including those in CEE – it has been unclear whether the existing legal framework supports the use of the Credit Support Annex and whether it is enforceable for corporates. Given the importance of ensuring access to hedging for CEE corporates, it seems certain that these challenges will be overcome and the use of the Credit Support Annex will increase as hedging prices begin to increase.

Arek Szperna, head of financial markets sales CEE, ING

austriaHead of corporate clients Karin GregorGalaxy TowerPraterstraße 311020 Wien, Austria+ 43 1 514 62 600

BulgariaHead of corporate clients Velitchka Hadjikosseva49B Bulgaria Blvd.,Entr. A, Floor 7Sofia 1404, Bulgaria+ 359 2 917 6777

Czech republicHead of corporate clients Robert ChudobaPlzenská 345/5150 00 Praha 5, Czech Republic+420 257 474 111

HungaryHead of corporate clients Tibor BodorDózsa György út 84/b.Budapest, H-1068Hungary+36 1 268 0140

kazakhstanHead of corporate clients Saida DjarbolovaDostyk Ave. 382nd Floor, Ken Dala Business Center,050010 AlmatyKazakhstan+7 727 266 8461

polandHead of corporate clients Pawel SerockiPlac Trzech Krzyzy 10/1400-499 Warsaw,Poland+48 22 820 4514

romaniaHead of corporate clients Radu RopotaBd. Iancu de Hunedoara nr. 48, Sector 1, 011745 BucurestiRomania+40 21 222.16.00

russiaHead of corporate clients Mikhail Chaikin36, Krasnoproletarskaya StreetMoscow 127473Russian Federation+7 495 755 54 00

slovakiaHead of corporate clients Ana LucasJesenského 4/C,81102 Bratislava 1Slovak Republic+421 2 59 346 499

turkeyHead of corporate clients Ernst HoffEski Büyükdere CadAyazage Koy yolu No: 634398 Maslak/IstanbulTurkey+ 90 212 335 16 44

INGBijlmerplein 888 P.O. Box 1800, 1000 BV Amsterdam, The Netherlands www.ingcommercialbanking.com

the 2012 guide to commercial banking in - home€¦ · leadership succession against a backdrop of...

Documents