Major Nordic banks including Swedbank AB (publ), DNB ASA and Danske Bank A/S are bearish on the outlook for their large corporates business after their lending volumes fell or flatlined in the first half, with senior bankers blaming large companies' preference for bonds and analysts attributing the trend to low credit demand from companies in export-oriented industries.
Nordic bond markets had a particularly active first half, with corporates raising €23.1 billion, more than the €21.3 billion raised in all of 2016, according to league table data from Bloomberg News.
As the Nordic capital markets mature and quantitative easing drives investor demand for fixed-income instruments, it makes sense for companies to diversify their mix of debt by using bonds, according to Jacob Aarup-Andersen, the CFO of Danske Bank, which reported first-half lending to corporates and institutions as virtually flat year over year at 192 billion Danish kroner.
"Pure bank lending in the large corporate segment is not a growth area. Where we are seeing growth is in SMEs," he said in an earlier interview, after Danske reported a year-over-year rise in first-half SME lending to 678 billion kroner from 657 billion kroner.
"As I see it, there are two main reasons [for the shift from bank debt to bonds]," Åsa Lind, CFO of Fabege AB, one of Sweden's largest listed commercial property companies, said in an email. "First and most important: The negative [Stockholm Interbank Offered Rate] in Sweden. Almost all bank lending contains a STIBOR floor, while the bond market does not. The second is that green financing is easier to get on the bond market."
Commercial real estate companies, in particular, are increasingly using bonds instead of bank debt, according to Swedbank CFO Anders Karlsson, who said during a second-quarter earnings call that the bank was no longer looking to actively grow commercial property lending volumes. Swedbank's large corporate lending portfolio saw modest growth during the quarter, at 203 billion Swedish kronor, up from 200 billion kronor three months earlier and 188 billion kronor a year ago.
Fabege raised 150 million kronor via a green bond issue in February, the latest in a series of similar initiatives, including a 700 million kronor green bond in November 2016. So-called green bonds, which provide financing specifically for environmentally friendly projects, have been gaining traction in Europe in recent years, catering to mainstream investors' demand for sustainable financial products.
Low credit demand
But for Pierre-Brice Hellsing, Stockholm-based associate, financial institutions, at S&P Global Ratings, the appeal of bonds is not the whole story. He argues that a downturn in the oil market and low credit demand from export-oriented businesses are more obvious drivers.
"An important element is shipping and offshore lending," he said. "Those are areas where some of the banks have been pulling back actively because of low oil prices. DNB has been doing this for a while, but it's only started to become visible recently because the Norwegian kroner has been depreciating and they have been lending in dollars."
DNB reduced loans to large corporates and international clients to 508.4 billion Norwegian kroner in the second quarter from 534.3 billion kroner in the year-ago period. The bank, which has been badly affected by high levels of impairments from clients in the oil and gas sector in the past, saw a lower level of impairments from the large corporate and international sector over the three months, at 313 million kroner, compared with 1.3 billion kroner a year previously. Nevertheless, it plans to continue with plans to pull back from corporate lending and focus on SMEs and retail instead, CFO Kjerstin Braathen said during an earnings call.
Larger companies in the Nordics are either cash-rich and do not need credit, or they simply do not have the appetite to grow, especially if they operate in cyclical industries such as oil, gas and shipping, said one Stockholm-based analyst who did not want to be named.
"A lot of companies have been focused on cutting costs instead of investing," he said. Pointing out that the global economy "hasn't been growing that much," he added: "The focus by the major banks has been on mortgages, which has been a red-hot market. But perhaps we will see a shift going forward because I don't think that can continue either."
The bond market is a useful way for corporates to diversify their funding mix, but it is not a substitute for bank lending as it tends to be more expensive and complicated to manage, he said.
As of Aug. 18, US$1 was equivalent to 6.33 Danish kroner, 8.13 Swedish kronor and 7.94 Norwegian kroner.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
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