The view from Europe

Eurofactor Kolumne in BCR Factorscan 29/07/2010

In the second of a series of articles from Credit Agricole/Eurofactor, experts in five of Europe’s major factoring markets – France, Germany, Italy, Spain and the UK – provide their insights into developments and market conditions across ‘old Europe’.

Experts across the five markets examine the cost of domestic facilities and how they have been impacted by the downturn; outline their responses to the rising threat of counterparty risk; address the cost and availability of credit insurance and give their thoughts on how the Group intends to leverage technology moving forward.

How has the cost of domestic factoring facilities for clients developed over the last eighteen months? Do you expect and/or want charges and interest rates to head back in the direction of pre-crisis levels?

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

I would say that there has been an inevitable increase in cost of funds as a direct result of the shortage of liquidity in the banking system and consequent economic impact upon supply and demand. Despite the gradual improvement in the market, liquidity is still an issue for some and I cannot see a material change in pricing for at least the next twelve months.

Céline Gasiglia, Head of the Strategic Marketing and Group Products Department at Crédit Agricole Leasing & Factoring (France):

During the last eighteen months, the two elements contributing to domestic factoring costs have followed opposing trends, namely:

  • A very strong decrease in funding fees due to the very low levels of Eonia and Euribor rates.
  • An increase of the servicing fees due to the higher cost of credit insurance.
  • For the customers, the all-inclusive price is thus balanced and quite competitive.
  • From our point of view, interest rates are not expected to increase significantly before 2011.

Stephen Bohner, Marketing and PR Manager at Eurofactor (Germany):

With the beginning of the crisis, when risk generally increased in our client portfolio, we had to adjust our pricing accordingly. We did not make a general price increase, but rather decided case-by-case, taking the individual client situation into account and explaining our decision in personal meetings with the client. In this way, necessary pricing increases were mostly accepted. Other reasons for price increases included that fact that interest rates had to be adjusted as the refinancing costs increased as liquidity tightened in the inter-banking market. Furthermore, credit insurers raised their premiums, which were then partly transferred in our overall pricing.

Compared to some of our competitors we were able to fulfil the liquidity needs of our clients thanks to the strong and stable shareholder background of Crédit Agricole.

Josep Selles, General Manager at Eurofactor (Spain):

The cost for clients has increased. We have lived for many years with low bad loans ratios and the credit insurance companies were also fighting to win market share, so prices reduced.

Only with higher risk clients did prices stay at the same level. But the situation changed and either the ratio went up or the cost of reinsurance increased dramatically. The factoring market saw how prices were increasing steeply, curious that we were unable to cover most of the risks due to cuts in limits. Prices now appear to be more stable and I do not foresee any major changes in the coming months, less still in terms of funding, as liquidity shortages still remains.

Massimo Mancini, Credit Department Director at Eurofactor (Italy):

In terms of factoring commission, I have to admit that the higher cost of risk, which has caused higher insolvency rates, has affected factoring commission in the case of non-recourse products. Cost of funding is also an issue, causing liquidity problems for many factors belonging to banking groups, even though globally speaking, the cost of lending money for factors has been very competitive - particularly when compared with the banks.

Lots of economies are looking to pump their exporters in order to bring down their deficits. Have you experienced a rise in approaches from exporters and how are you looking to increase interest in the international offering among businesses in your home market?

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

As part of the largest pan-European funding network in Europe, and members of both FCI and IFG, we are as likely as anyone to see demand for export funding. Despite this, we have not yet seen any material change in export volumes.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

We haven't experienced this issue yet. The main point for us is to obtain good coverage on foreign debtors. This will be the key factor for the development of export business. With its integrated European network and partnerships with IFG and FCI, Eurofactor is already a strong competitor with its international offering to business and is looking to re-market its international offers.

Stephen Bohner, Eurofactor (Germany):

The export sector in Germany has traditionally been very strong (the country ranks second after China worldwide) and has recovered relatively quickly from the recent crisis (when compared with other European nations), so we have not seen any form of special political support or subsidising of the export sector. On the contrary, the German “Abwrackprämie” that subsidized the buying of new cars and the disposal of old cars during the crisis was rather a support programme for domestic car producers and car importers.

Along with the worldwide economic recovery, particularly in China, but also among other Western European countries, we experienced an increase in German exports, which was reflected in the growth rate of factored export turnover. Our import business has also grown significantly this year following the recovery of key foreign export economies, namely China, Taiwan, Hong Kong and Turkey.

In most prospective cases, the factoring offer will also include the firm’s export business - so long as the respective country and foreign debtor risks can be covered. And Eurofactor AG has traditionally played a strong international role in the German factoring market. With respect to this market, our good service quality has led to us winning a number of awards, regularly winning Quality Awards given by FCI and IFG – for example the combined FCI Export & Import Factor and the FCI Import Factor of the Year, which we won this year.

Josep Selles, Eurofactor (Spain):

Spanish exports have increased in recent months. Companies have profited from the decrease in the value of the euro and the fact that neighbouring countries are faring a little better than us, with external demand more buoyant than that of our internal market. We have grown our export volumes by 73.3% compared with the corresponding period in 2009 and the export factoring market is growing by 18%, whereas domestic factoring grew by 6.3%.

Massimo Mancini, Eurofactor (Italy):

Unfortunately, it is still premature to say when this may occur, but we are certainly seeing an improvement, albeit slow. The credit insurance market is a little bit more relaxed and cost of risk is not deteriorating further. Only when we have a clearer picture of the crisis, will it be possible to give a deeper insight.

How significant has the threat of counterparty risk been over the last eighteen months? What are your expectations for the second half of 2010 and how are you looking to mitigate against the threat?

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

Of course, given what everyone has experienced, I am sure that we are more alert to these risks nowadays. As an organisation, we are fortunate not to be exposed to such risks in any significant way and I would consider that our checks and controls will remain as strong as they always have been.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

The issue of counterparty risk probably reached its peak over the last eighteen months and the number of bankruptcies has decreased by 5.2% over the last year. Nevertheless, factoring companies such as Eurofactor France have succeeded in managing counterparty risk and reported a very good risk level in 2009, along with strong activity performance taking into account the turnover drop.

Stephen Bohner, Eurofactor (Germany):

We experienced an increase in counterparty risk, especially in such countries where banking business was worst hit by the credit crisis – such as USA and parts of Europe. Those factoring partners that are subsidiaries or integrated departments of larger banks with high risk exposure in other sectors could have been directly affected by the deteriorating credit portfolio of their mother bank.

Meanwhile factoring companies that fully depended on the funding of a troubled bank were likewise exposed to higher counterparty risk. We therefore started from the beginning of the crisis to assess closely the financial situation, shareholder background and financial dependencies of our potential factoring partners before we introduced business to them. On the other hand, we had to prove our solvency to our factoring partners before receiving business. This was a good opportunity for us to communicate our strong financial standing and shareholder background.

Since 2010, and after the immense governmental support for the banking sector, the situation in the global banking market has significantly improved. But we keep a close eye on the further recovery of the financial sector.

Josep Selles, Eurofactor (Spain):

We are a little bit surprised at this issue. We have been analysing our counterparty risk, even in good times, as we recognise that it is an integral part of the business, part of our risk. Of course, we have revised our entire counterparty portfolio and we have changed correspondents in certain countries. However, I must confess that we have not done so in many cases.

Possibly, we have increased our attention to country risk, which we were also analysing before, but we have now seen how countries which until two years ago were unquestioned in terms of risk, have suddenly become a concern. Certain countries have gone from almost any kind of analysis, to being suspicious of everybody, seeing dangers even where none exists.

How has credit insurance for international operations, in terms of provision and cost, fared over the last couple of months?

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

We are probably seeing less of the industry-wide refusal to extend cover in certain sectors, but cover is still difficult to obtain and the cost where it is available can prove prohibitive. The credit insurance market is fundamental to the success, or otherwise, of funding international transactions.

Stephen Bohner, Eurofactor (Germany):

It was particularly noticeable last year that all the credit insurers increased their premiums, tightened conditions and cancelled credit limits (in some instances industry or even country-wide). In recent weeks the risk appetite of the credit insurers appears to have returned following the improved outlook for most economies and after an update of their databases.

Josep Selles, Eurofactor (Spain):

Even in our own domestic market, we have seen how some credit insurance companies have timidly started to open their vision on risk, granting more lines than were seen a few months before. However, the cost increases we suffered throughout 2008 and during part of 2009 have not changed and prices are high, without any expectation that the situation is going to change by the time these reinsurances are due for renewal at the end of the year.

Massimo Mancini, Eurofactor (Italy):

As I have indicated previously, the feedback from credit insurers is less negative than a year ago, where costs were reported to have increased in mid-2009. We have recently noticed an improvement in respect to costs.

How can investments in technology strengthen and transform the offering and how is Eurofactor-Credit Agricole looking to leverage such advances to strengthen its offering?

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

Technology is the perennial consideration in any product diversification and also in relation to how we can administer and consequently price such products. Eurofactor Group is in the process of a pan-European technology project to which it has committed significant investment.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

Eurofactor / Crédit Agricole is always looking for technology to develop services provided to the client (on-line transactions and reporting for example, or zero paper offers), to optimise its internal process and to provide best quality at competitive prices.

Stephen Bohner, Eurofactor (Germany):

Investments in technology can strengthen the offering in various ways. Investments in operational technology may help to improve efficiency in front- and back-office processes.

Regarding front-office processes, optimised systems can reduce the administrative efforts of the clients. Furthermore, they can expand the range of reporting possibilities to the client.

And, aside from personal contact, they can support communication with clients very efficiently, for example through the easy handling of modern, online factoring tools.

Investment in back-office processes can support internal administrative efficiency, automating processes where possible and minimizing the redundant workload resulting from less efficient systems. Furthermore, the risk monitoring process can be enforced and optimized. Staff can focus more on client needs and service aspects to optimise dealings with the client.

This individual client focus serves to strengthen the offering, as factoring is a service business.

Eurofactor Germany invests constantly into its IT-systems, website and other technological features to keep up with technological developments in order to apply such improvements to client service.

Josep Selles, Eurofactor (Spain):

We are now investing in a new IT system for the entire Eurofactor Group. This was planned before the crisis started and we have continued with development despite the costs involved.

We understand that we must continue planning for the future, while closely following the present and the risks involved. In addition, we have revised our administrative circuits for our day-to-day business as well as developing a focused business strategy to discover opportunities, either to increase performance, reduce costs or become even more competitive.

Companies like us, with a strong presence in the market, strong development and a capable management, must profit from the crisis and take a step forward in order to emerge from the crisis in a better position than we were in before.

Massimo Mancini, Eurofactor (Italy):

The Eurofactor Group is led by a common sense of purpose, acting as one within different local environments, with a unified product and service offering. We continue to drive the market with the most efficient processes, utilising an integrated CRM tool across the Group. Sharing commercial databases and anticipating clients' request with new and customised offerings represent the main challenges and opportunities for our group moving forward.

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