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Speaker Q&A Session 2 - Werner Schmidt

Mr Schmidt will be speaking at the 10th Annual Export Finance Germany Conference taking place in Berlin on the 1st and 2nd of December.


So Werner, how has the export finance market been for Deutsche Bank in 2016?

Well if you look at 2016 and the current unstable geopolitical environment and macroeconomic challenges in some regions, new deal flow has slowed down in line with the market and is reflected  in the lower ECA activity overall. However, we have been quite busy in executing mandates, which is certainly a reason to be positive. Also because there is a long pipeline for new deals we have a positive outlook for 2017 and 2018, with the number of ECA deals set to be bigger than this year.

Ultimately, the success of the export finance market rests on the whole investment climate where investment decisions have been recently delayed due to the current geopolitical instability and uncertainty.

Can you expand on why there has been such instability this year?

From a geopolitical standpoint, commodity prices have made a big impact in what are considered the usual export destinations such as the Middle East, Latin America and Africa. In Latin America, Brazil is a notable example, which has been going through difficult times of late. You then have China, which is slowing down impacting growth in other Asian countries and there are the sanctions on Russia that are restricting activity and delaying new investments.

Are Deutsche looking to diversify and offer smaller tickets sizes considering these risks?

The size of the ticket is not the first thing considered when making a deal, it is more about the feasibility. What I mean by feasibility is the comprehensive analysis of the economic and risk profiles when financing the transaction. It is important to fully understand the risk and be comfortable with both the financial and non-financial risk.

In relation to the prospect of smaller tickets, there are some overall challenges given the tighter regulations and corresponding increases in operating costs. This is not to say that we won’t be looking at the prospect of financing smaller tickets but it first depends on the feasibility of the deal.

How are you viewing the export destinations going into 2017? Can we be more positive?

Well, as a global business we follow our clients across all regions. You cannot focus on a certain cluster in any part of the world. We have identified a lot of potential across the board including the CEE, CIS, Asia, Africa and Latin America regions.

With multiple crises in recent times, exporters are looking at new markets beyond the established emerging economies of the BRICS countries. For example, you have emergence of Argentina and the other smaller countries in Latin America. Also, the Middle East has increased their involvement in export finance and we are especially seeing this in Saudi Arabia, UAE and Qatar. The CEE and CIS regions are more established and North African countries like Egypt will provide further opportunities. In summary, we are seeing a more diversified picture going into 2017.

How about the sectors within this diversified picture- which are looking the most promising?

I would say it is everything around the capital goods markets such as machinery, infrastructure, transportation and energy projects. Generally all players in manufacturing and engineering are interested in the export finance market. And from a German perspective, our exporters from the Mittelstand to the multinationals segment are primarily based in this area, so we can expect a lot of activity.

You mentioned the cost of increased regulation earlier, what do you think this will mean for ECA deals?

Cost is increasing and we also need to convey the extra regulatory requirements to our clients. It takes more time to structure deals as we need to make sure we are fully compliant with all relevant regulations.

However, such additional cost does not exclusively derive from new regulation. Most of it has been around for a long time, but what has changed substantially are additional and tighter documentation requirements which need to be evidenced, in particular in regards to KYC, anti-money laundering, and financial crime.

Also, Basel III and the upcoming Basle IV rules have and will of course impact the banking side in how it treats risk on its balance sheets and, consequently, on capital demand. Even more importantly, current leverage ratio regulations have a substantial impact on export finance as the low risk weight of ECA-backed transactions is not considered.

In summary, we have to ensure full compliance with the regulatory and banking environment. As such if you want to remain prudent, you must accept that the review requirements and the direct and indirect operating costs will go up.

Given the long-term trend in increasing documentation, could digitalisation help ease this administrative aspect?

It’s a very good question. Certainly, the technological side can improve communications and make processes much more efficient. However, I think the core drivers for export finance are structuring capabilities and having close relationships in order to support our clients. Technology is very much a secondary driver and export finance is more about professionalism and experience. Nevertheless, we are at a computer screen most of the time communicating with clients and partners and digitalisation could help to do this more efficiently. It will optimise the ECA process but it won’t be an overall game changer unlike in the flow business segment.

At the conference, you will be on the project finance panel. How active is the pipeline for financing long-term projects in the current climate?

We touched upon the geopolitical environment earlier and the fact that regulation has become much tighter in recent times would suggest that prospects were not looking great. However, the pipeline is looking positive and this is also for long-term projects.

Generally, the questions raised when financing long-term projects is whether there is enough liquidity and appetite in the market and I would say there is. We are starting to see a lot of bank interest and liquidity in project finance with an export finance element. For both corporate export finance and project finance with export finance, the key is that the investment climate improves. If this happens, we are set to see many long-term mandates.

Finally, what would your advice be for German exporters?

Our German exporter base is well experienced and know the markets well, but my advice would be to approach banks in a timely fashion. Given the risk landscapes and how quickly they can change, it helps for banks to be involved as early as possible so the feasibility of the project can be determined. This is especially the case now, as exporters look to new markets.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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