This month we talk to Mikael Björknert about the challenges presented to corporates by today’s turbulent markets and how these can be overcome. We discuss strategies for the cross-cultural exchange of knowledge, talk about the challenge of bringing corporates and banks onto the same page and consider whether green initiatives are a thing of the past.

What are corporates’ main concerns today and how are they responding to them?

The most pressing and most obvious concern for corporates right now is lowering their general cost level, say of administration or production, to meet new lower sales levels due to the crisis. Corporates are also trying to maintain a healthy and sustainable size and quality of balance sheet, ie focusing on liquidity/cash flow and risk management to minimise short-term dependence on the capital/funding market. For every company, each of these main concerns can be broken down into several different subsets depending on how hard the company has been hit.

As for how corporates are responding to these concerns, I think it’s now clearly visible, of course to different extents, that corporates themselves lack a holistic overview and are not strong enough to reshape their processes and governance models in relation to process efficiency, risk and working capital management. After all, this really is what they should be doing in order to come out stronger when the economic turnaround starts.

This lack of foresight and understanding, with regard to the full integration and optimisation of the financial supply chain towards the physical, limits corporates’ ability to enhance their sustainable competitive strength. So much effort is being put in to ad hoc cost cutting initiatives that companies are simply fire fighting the current challenges without looking forward to tomorrow’s opportunities.

So what’s the answer? What do you think companies should do to become more long-term focused?

Honestly, it is tough for a banker to understand fully the different prerequisites when giving general advice to corporates. However, at SEB we believe it would be extremely beneficial for corporates to have a broader understanding of the correlation between the physical and financial supply chains. This means increased communication, cross-collaboration and alignment based on the overall objective to enhance processes.

To get people understanding the value of aligning the physical and financial supply chains, you need to gather people from each function in the same room and dispense with the jargon. When companies do that, I believe that they can discover ways of substantially improving the cash flow and managing aggregated cost reductions, but importantly, with both sides present they can also get a clearer picture of any potential risks.

The world out there is more uncertain than that which companies had become used to; therefore attitudes to risk also need to change. A corporate must be comfortable with its counterparty, in the sense that they should have a long-term, secure and stable relationship. However, with the crisis it’s more difficult to have control over a counterparty – for example, a supplier’s bank credit line could be withdrawn within 24 hours if their bank has problems. Also, the political risk is quite difficult to monitor if it includes many different markets.

What’s the easiest way to go about reassessing your risk?

On paper, the easiest option for a corporate is probably to move out from businesses with higher risk levels, thereby ensuring that the cash flow and balance sheet remain stable and healthy. However, that is also taking a black and white view of the world and of course not a viable alternative. In reality, it is totally the opposite: corporates must climb the risk ladder even further to be able to win contracts and to secure a healthy supplier base. Consequently there is increased pressure on corporates’ liquidity base and balance sheet.

This is an extremely important balancing act, and there is an increased demand on corporates to use their balance sheet and liquidity position for sales support financing, in the form of extended payment terms or vendor financing arrangements – it’s not an option to pull out of such risks altogether. The important factor to consider here is knowledge transfer, which puts new demands on everyone to contribute, from treasury, sales and marketing to procurement and logistics.

There needs to be a cross-cultural exchange of knowledge, and I think that is applicable not only within the company, but also between the company and those who provide some of these liquidity management and risk solutions – such as the banks. As an example, the terminology and focuses in the working capital area are quite different in finance and purchasing departments – especially in banks – even though the different angles of working capital are all very much related.

I would say that the banks need to improve in this area as well. In general, banks have a tendency to look at each area separately instead of looking into the full value of the integrated supply chain. For example, in order to be capable of taking a holistic view towards their clients, banks should let go of their internal product area borders, which present limitations.

What is SEB doing at the moment?

Within Global Transaction Services (GTS) we have now gathered together all the necessary business areas – cash management, trade finance, leasing, factoring and supply chain. We create teams that sit together and we try to get the team to act not only from a cash, trade or supply chain perspective, but from a holistic value chain angle.

SEB has an advisory approach where the client’s financial supply chain is reviewed alongside the physical chain. This can be further developed using the SEB Corporate Value ChainTM methodology as a starting point. SEB’s role is to identify areas for improvement in processes that contribute to liquidity optimisation and risk management, prioritise activities that will deliver the greatest value and deliver concrete solutions to the challenges corporates are facing today.

SEB’s Corporate Value ChainTM approach has been very successful in that those we are helping are extremely satisfied. On the other hand, it is a slower process as we work one-on-one with our customers. I don’t think that many other banks are actually equipped for working like this with every customer on a large scale.

Can we talk about how working capital management has changed with the financial crisis?

Firstly, there’s a greater general awareness among corporates. I think that working capital has become so important that corporates are strengthening their relationships with select counterparties. When they do that, they get more out of the partnership instead of buying piece by piece services.

That has certainly been a very strong trend in the financial crisis, together with the increased usage of specific instruments like factoring, different types of insurance solutions or trade finance arrangements. For corporates, the most important thing right now is securing working capital – not reviewing how the capital ‘works’ as such.

I believe that working capital will become tighter still – even if everybody is talking about a turnaround at the end of this year or the beginning of next year, that is still a turnaround from extremely low levels. So I believe that working capital – and helping the corporate to get enough working capital – will be the number one question over the next year, all because of the crisis.

How have customer relationships changed with the economic turmoil?

SEB already had a strong position in the Nordic area but this has in fact strengthened significantly since the financial crisis. This strengthening is due to the fact that most large international banks have disappeared from the area, choosing to focus on their core markets.

This has been very beneficial for SEB and I would say that we have probably never had such a strong position among the large corporate segment as we have right now. Indeed, we have never had such high earnings from this segment as we have at the moment. So we are making the best of the situation.

However, it is not without challenges for SEB to cover the gap left by the international banks. As such, SEB and GTS have had to focus even harder on advising clients on working capital measures in order to recycle their liquidity more efficiently, thereby reducing the funding demands on SEB from the corporates.

Staying with the financial crisis, have green policies moved off the agenda?

No, not at all. Aside from the human aspect of the ethical approach – that we should be greener – there are also economical views on this. What we see is that quite a lot of companies now require green investments under their investment policies. In fact, at SEB we believe that the next investment boom may well involve types of green investment. As a bank, we are preparing to be the counterparty of choice in that area – corporates want to have a counterparty that takes the environment seriously and has a truly green approach.

This means adjusting products and services, as well as demonstrating commitment to the market. Green policies are very high on the SEB agenda, and we actually gathered around 120 key stakeholders in Sweden at a three-day conference here in June to discuss our green product portfolio and approach. We have just issued the first green bond in conjunction with the World Bank and this has been a great success.

We also have green offerings in the private individual space – for instance, if you want to get a car loan and you buy a car that is deemed to be ‘environmental’, you receive lower interest rates on that loan. Although we are very keen on the green offering, we also realise that this movement may take many years to come to fruition.

How is the banking landscape in Europe changing?

Of course the European Commission’s Financial Services Action Plan is extremely important for Europe, with the main initiatives there being MiFID and SEPA. However, what we have seen so far is larger changes in the securities market through MiFID than changes through SEPA in the payments market.

In the securities market you have the stock exchanges and the new multilateral trading facilities (MTFs) and central counterparty clearing houses (CCPs) that are causing many ripples on the surface of the banking pond. Meanwhile, SEPA is a little bit slower – I think there still is some resistance among the banks and this will only get tougher when the PSD comes into full force.

In the Nordic area, the Finnish corporates are moving strongly into SEPA, starting to buy SEPA services, adjusting their accounts payable, accounts receivable and so on to SEPA payments – they are moving to the standardised world. Here we will see the first test for banks – can they adjust to the new environment? Can they transform themselves to voluntarily reduce income from standard services and expand their value-added services quickly enough to regain some of the income tap?

What do you think is the way forward?

The way forward is that the banks need to start coming up with value added services so that both parties can get the standardised low cost payment flow that they need and at the same time not get rid of all the benefits they have built up in the old payment system. At SEB we are very pro-SEPA and at the forefront of adapting to the new SEPA environment for real. We believe in combining a basic SEPA offering with a holistic approach like SEB’s Corporate Value ChainTM to help clients improve their working capital position and financial supply chain, in turn adding the extra value that the clients will appreciate.

How else has SEB been differentiating itself?

Right now we have a tier one capital ratio of 13.1% and that is the highest in Europe, setting us in a front position. What we are doing is concentrating very much on our existing clients and trying to get them through the cycle. We save capital when times are tough and at other times we use the capital for expanding.

Are there plans for expansion on the horizon?

As I mentioned, there is an expansion towards the Nordic large corporate sector whereby we we want to strengthen relations with these corporates, as well as with financial institutions. On the products side, we are taking our existing products and combining them into tools – it’s more a way of thinking than a completely new product set.

What challenges do you think will arise over the next 12 months?

I think that most corporates and banks will probably be challenged by the public – some believe there will be a quick economic turnaround, others believe it will take longer but everyone wants a prediction. I think these conditions will turn business back into a strategic game. In times of improved earnings it is very easy to stick to what is profitable or what is safe. Now, people may dare to do things that they haven’t done before – or maybe they will do them because they have to. Some companies will not necessarily have the luxury of choice.