ING: There is no such thing as a perfect hedging solution

With the economic meltdown, Czech companies learned the hard way how to hedge their businesses. After currency and interest rate risks, now it’s time to learn commodity hedging

Markets & Finance
Cristina Muntean | 30.11.2010

Two years ago, very few Czech companies were addressing their commodity risks. They were much more concentrated on foreign currency (FX) risk and the interest-rate risk, but the commodity risk was overlooked.

“Czech companies were focusing on FX risk because this was causing most of their problems. Moreover, the discussions about euro adoption could hugely impact company revenues. Commodities weren’t a problem until recently when we’ve seen the price of oil jumping from $80 per barrel at $160 then at $30 and now back at $80,” said Arkadiusz Szperna, head of sales for the ING Financial Markets Central and Eastern Europe division. “Those jumps drove companies’ attention and the commodity risk was rediscovered,” he said.

The Dutch bank is trying to tap the new reality and offer new commodity derivative products that would cover goods from oil to diesel, metals, and soft commodities like corn or wheat. “Commodity is a good story for us because it came out of the demand from corporate clients. That is moving nicely to become one of our core offerings,” said Marge McGrath, global head of emerging markets sales with ING. The Dutch bank is offering new commodity derivative products that would cover goods from oil to diesel.

However, regarding the major challenge of corporate hedging overall, she said that there is no such thing as a perfect hedging solution. “It really is client-specific and it’s very much dependent on what the client’s needs are for t long-term and short-term financing, what kind of production they have, what their local versus international demands are,” McGrath said.

Expansion to lower mid-corp levels

Going into commodity hedging is one of the latest steps taken by ING to grab a larger share of the Czech corporate banking market. Recently, the bank opened a corporate banking subsidiary in Brno, South Moravia, and it’s planning more.

“You can see what the biggest cities in the country are, but [concerning further toward opening the branches] it’s up to the local management to prepare a business case and then get it supported,” Szperna said.

“It’s important that we made this step, and we opened Brno because this is a clear signal for the market that we’d like to see other clients as well and go down the market, which is not the case for many other countries,” he added.

Demand for financing from smaller companies drives the bank’s approach. “We see more and more demand coming from mid-corporate clients, which means that we’re starting to look at them from the bank perspective,” Szperna said.

“This is an extremely important client base for us in terms of financial markets to promote our derivative hedging products and address all types of risk like FX, interest rate and commodity type of risk. It doesn’t mean that we’re in a stage to develop a fully fledged mid-corp type of operations. However, the bank is making a step in that direction and is tapping key potential clients in that segment.”

ING is currently working with potential clients that have annual revenues over €50 million. Anything below goes to the mid-corporate market segment. “Now what we’re doing is that we’re looking at growing companies that have the turnover over €25 million that show growth potential.”

No SME financing, for the moment

Despite the new focus, ING doesn’t plan to go in the direction of small entrepreneurs and start-ups. “If they’re just starting the business, we’re not in that segment at the moment. That would mean that we would have to have a fully fledged, fully running SME type of operation, which we don’t have,” Szperna said.

“We have experience with that type of business in other locations, so it’s not that we’re uncomfortable with it,” McGrath said adding that it was a strategic decision at top level in terms of where the bank targets its client sector in each location.

Currently, the main competitors of the Dutch bank are the US-based Citibank, the UK-based Royal Bank of Scotland (RBS) and Czech-based Česká spořitelna (ČS) and Československá obchodní banka (ČSOB). 

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