with Pal Mitlid, Head of Large Corporates Norway, Danske Bank
Last year Danske Bank engaged in a global restructuring process. How has this affected your service provision in the Norwegian context?
Pal Mitlid (PM): The restructuring process meant that last year Danske Bank moved from a country-centric organization to a divisional structure. The country focus and country brand names were therefore eliminated, meaning that the name Fokus Bank disappeared from our branding in Norway. However beyond that, for the Norway division the restructuring did not entail a lot of changes in the way that we operate, at least over the short-term. Our large corporate clients have always associated us with the Danske Bank brand. Moreover, all of Danske Bank’s representative groups in the large corporate division across the Nordic region were already closely integrated with our headquarters in Copenhagen. This had been the case for many years before the restructuring. Over the long-term, the hope is that this process will bring better streamlining and an increased level of efficiency to our operations overall, as the divisional breakdown becomes the principal organizational structure.
How is Danske Bank currently structured in relation to the Norwegian maritime and oil & gas sectors and how is it positioned as a provider to these sectors?
PM: “Danske Bank is structured slightly different to several of our Nordic competitors in relation to these two sectors. The offshore oil service segments would fall under the maritime division in most Nordic banks. In Danske Bank companies within these segments are predominantly defined in the oil & gas sector. The maritime sector represents roughly half of our corporate business in Norway. Within the Large Corporate division oil and gas accounts for 30-40% of the business. Therefore both sectors have a large importance for the bank. Regarging our overall positioning, in both the oil & gas and maritime sector, Danske Bank is ranked as a number three player after DNB and Nordea, and probably jockeying for this position with SEB bank.
Whilst the European banking sector is in crisis and withdrawing from significant sectors like shipping, what opportunity is there for Danske Bank to expand its client base?
PM: There is an opportunity to expand though the picture is not as clear-cut as one might assume. Firstly, the withdrawal from the market is mostly confined to maritime financing. However, even in this sector, the picture seems to be that whilst some banks are withdrawing from certain client deals, they are cutting new deals with others. Even if the overall net trend is for banks to withdraw slightly from this market, there are still many European players remaining with strong portfolios in the shipping and large corporate segments. In addition, any slack in the financing of the maritime sector, as a result of banks withdrawing capital, has been taken up by the huge growth in the importance of the bond market over the last six to 12 months. This means that the level of competition remains strong. The competitive landscape has not changed that radically and in the Nordic region in particular, we see stiff competition between the main banks.
Rolf Erik Linge (REL): Just to add to what Pål is saying we have seen some banks becoming more restrictive in use of balance sheet also for the oil & oil service segments. For the blue chip names in this industry as in other industries the interests from banks remain strong though. After the financial crisis we see that the bank market differ more between good and the not so good credits.
In this picture, how divergent are the maritime and oil & gas sectors at the moment?
PM: At the moment, the growth aspirations of our shipping division are lower than that of our general corporate and oil & gas division. The oil and gas sector is performing well and we will expand in this sector over the coming years.
In part, the trouble of maritime financing is a result of the new Basel 3 regulations, which state that we need to allocate a lot more reserve capital when lending to asset heavy industries and shipping is clearly an asset heavy industry. The ability of banks to expand in the maritime sector is therefore challenging. Another factor is that most banks at the moment, including Danske Bank, are focused on selling a wider selection of products to existing clients; the shipping industry has traditionally been a single-product industry where secure lending has been the main focus.
Regarding our lending practices, Danske Bank is focused on having relationships with clients, which are broad and deep and not only being present as a capital provider. Danske Bank does not want to be in the conversation if the only thing a client wants is capital. We want a broader strategic partnership with our clients, involving close cooperation, where we provide many products and services over a longer time frame.
How do you expect this change in banking practices to affect the way the maritime and oil and gas companies choose to finance their operations?
PM: We are observing a mega trend in which a more significant portion of corporate financing will come from the bond markets. This may not be to the same extent as you see in the US, but much more than has been the case in a historically bank-funded Nordic market. Companies have learnt through the financial crisis that it is smart to diversify their sources of funding and clearly the banks were not there for clients in the heart of the financial crisis. This has provided a cautionary tale for companies regarding diversification in their financing models.
Whether looking at oil and gas or other sectors, there are some extremely large capital demands being placed on the banking sector. For example, the power industry in Norway is looking to invest up to USD 200 billion over the next 10 years and they clearly do not see bank funding as the only means to attain these sums; other sources of funding such as the bond markets will be necessary.
The bond market has also been a lot more important for start-up companies within the oil and oil services sector. Innovative companies have struggled with the banks, because the banks want to see cash-flow before they invest.
When mentioning the good names, which sectors will find it easiest to attract bank financing?
REL: Virtually all oil & oil service sectors have developed well over the last years. There are various elements deciding credit attractiveness and there are winners and losers in all sectors. One element deciding access to debt financing is borrowing base, i.e. assets generating robust cash flows. And the more diverse your borrowing base is, the more attractive.
PM: In the oil and gas sector it is hard to secure bank funding until you start production. In this case, you are also better off with a few fields in order to eliminate the concentration risk. So again it is about diversifying the borrowing base. All the same, there have been some single-field borrowing facilities made available in some cases. Often these fields had multiple reservoirs and a good level of insurance.
Norway is also fairly unusual in having the banking sector providing loans to exploration companies. This is thanks to the exploration rebate in Norway, which essentially allows banks to lend against government-backed risk. This has secured financing for companies, which otherwise would not have been able to exist and has led to a proliferation of new exploration companies. Many of these small companies are not targeting the big elephants but aiming at smaller, marginal fields and they will continue to have good access to capital.
There are some major infrastructure developments to take place in the North of Norway. How do you see the role of the banks in this movement?
In the late 1970s and early 1980s there were some project financing mechanisms in place for pipelines in the North Sea. However that is not the case today. Typically the oil companies involved in the developments in the Barents Sea are so financially strong that they self finance. This will presumably be the model going forward.
How do you see the potential to develop Danske Bank’s position in this market over the coming years?
PM: Danske Bank aims to grow its position in Norway with a special focus on the oil and oil services sector. This is an asset-class where we have room to grow significantly. The competition will be strong, given the presence of our Nordic peers. However, we have people with many years of experience in oil and gas lending and we believe we are well placed to develop our services in this segment. Danske Bank has considerable exposure to the industry, a strong bank behind us, long-term aspirations and a team in place, which understands the industry and will be a good financial partner to an clients looking to work with us.