National-Bank invests in an unusual niche
Dr. Lange, with regard to Germany, the image of the "sick man of Europe" is circulating again. How do you view the German economy?
In principle, the vitality of the German economy remains unchanged. We should refrain from talking down the economy. The fact is, we are in a recession. The recession is primarily a result of the monetary policy framework. Ten consecutive interest rate hikes are something the economy cannot withstand without leaving marks.
Isn't the current development also a result of geopolitical changes, with all the consequences for the economy, trade, and globalization?
Yes, geopolitical uncertainties are also relevant. This applies to us Europeans, especially since Russia's warlike invasion of Ukraine. Despite the warnings of some apologists, it was the ultimate wake-up call, even though there have been earlier occasions and developments that should have made us more cautious in hindsight.
In conversations with industry leaders, I perceive an extremely pessimistic attitude, much more than just a cyclical downturn. Does this affect your credit business?
As the head of a financial institution, I look at the economy as a whole. Therefore, it is important to differentiate. Some sectors, such as the steel or aluminum industry, are suffering from dramatically increased energy costs. The same applies to the chemical industry – with all the consequences for the German economic landscape. But there are also other sectors. The portfolio mix is crucial. The bank's loan book reflects only a slightly declining economic activity.
Thomas A. Lange
We are playing it defensively and taking a cautious approach.
How has your loan portfolio developed?
Compared to the end of 2022, we are approximately €60 million below the previous year's level, with a total of over €4 billion. We are playing it defensively and taking a cautious approach. The old saying holds: The best deals are often the ones you don't make. Overall, we have a broadly diversified portfolio with a strong focus on the middle market. This year is expected to be the best in the more than 122-year history of the National-Bank.
What is the reason for this?
On the one hand, it is the monetary policy conditions that support the solid business model of the bank in the event of a positive interest rate environment. On the other hand, as the nationwide largest pre-financier of insolvency benefits, we have counteracting effects compared to a generally reduced credit demand.
In other words, you advance for the Federal Employment Agency (BA) and pay employees their salaries in the event of insolvency. Is it a risk-free business?
No, no business is risk-free. However, in this financing offer, operational risks usually play a greater role than default risks. An example of this is that the number of employees or their actual working hours may be incorrectly calculated in the first salary run. It is different when, for example, in a self-administration, the application for the opening of insolvency proceedings is withdrawn by management, and payment has already been made.
Meet the person
Thomas A. Lange has every reason to be satisfied with himself and "his" bank. In 2023, the regional bank will achieve the best result in its 122-year history. One reason is he interest rate turnaround. However, it was also a stroke of luck that HSBC Germany offered the National-Bank the business of pre-financing insolvency benefits in the fall of 2022. It is the luck of the diligent one who guides the destiny of the bank with foresight. The extensive range of mandates and additional responsibilities he undertakes indicates his inclination to be actively involved on a national level, amounting to more than a full-time commitment when combined.
How lucrative is this business?
We can make a living from it. As soon as the Federal Employment Agency confirms its obligation, the pre-financing is privileged in terms of capital adequacy supervision.
But the business probably yields low margins.
The prices of our financing offers are risk-oriented. They are lower than in classical SME financing. Nevertheless, it is an aspect that contributes to the stability of our business model because, with an economically declining development, the applications for the opening of insolvency proceedings increase. Scalability effects must not be neglected. By the end of September, we were able to accompany more than a third of all applications submitted to the BA for the pre-financing of insolvency benefits. In terms of volume, it is more than half.
Which banks are involved in this business?
Primarily, it is the so-called major banks. There are still some savings banks, but their offerings in this business field are without structural market relevance.
Are there fixed connections between the bank and insolvency law firms?
The business relationship exists with the respective insolvency administrator – usually over many years. Excellent service, quick decisions, and a profound understanding of insolvency law are indispensable in our support.
Can you outline the scale of this business?
The volume is currently slightly over €500 million – with an increasing tendency. In addition, there is the follow-up business with the respective companies. It makes a substantial contribution to our pre-tax result as of the end of September, which is around €65 million.
How many insolvency administrators does your portfolio include?
The number of insolvency administrators and restructuring consultants that we count among our clients is considerable. It is close to 500.
The large insolvency proceedings are likely crucial.
That is correct.
Back to the credit business with healthy companies. According to the latest ECB Lending Survey, small and medium-sized enterprises, in particular, are confronted with tightened lending standards. Is that so?
We have not generally tightened lending standards, but rather, in an economically challenging environment, we decide case by case, taking into account all risks. Only in the area of commercial real estate financing, we have hit the brakes early and, for example, no longer offered financings classified as speculative from a supervisory perspective.
What does that mean?
Higher equity shares, shorter maturities, or stronger collateralization are examples. Details are discussed in a partnership and trustful manner between the customer and the bank, and the bank and the customer. The credit business remains a trust business. The risk provision in the credit business has been inconspicuous in recent years, and it remains so this year as well. The bank's NPL (Non-Performing Loan, Ed. note) ratio is below 2%.
Thomas A. Lange
I am torn on the issue of industrial electricity prices.
High energy prices also plague medium-sized businesses. What do you think of the often-demanded industrial electricity price?
I am torn back and forth on this issue. On the one hand, we must do everything to ensure that energy-intensive industry and its high-tech value chains remain in our country. On the other hand, I am fundamentally against subsidies. In the need to decide, I would vote for a temporarily limited industrial electricity price. Ensuring global competitiveness in a fundamentally changed geostrategic environment is a priority – also for economic resilience and social cohesion.
The mood in the economy is poor. It seems that companies have lost their creative courage. Are the requirements associated with the desired transformation too high?
The federal government lacks economic expertise. Labor costs, bureaucracy costs, documentation costs, energy costs – we can continue advancing in the alphabet of costs. Most of it is regulatory-induced. And an end is not in sight. I wonder, for example: Why is the electricity tax not abolished? We need clear, predictable, and robust economic policy frameworks. Companies have not lost their courage yet. But there is a growing risk of overburdening, especially for small and medium-sized enterprises.
As a bank, you are directly affected by the transformation. You have to collect ESG data from corporate customers. However, unlike large corporations, the middle class usually does not have sophisticated collection models. What does that mean for you?
The availability of data is sometimes not as desired. However, it is a fact that there is a strong commitment to transforming our business model into sustainability. Regardless, we are hardly involved in industries such as mining, oil and gas extraction, coking and petroleum refining, air and shipping, as well as forestry and logging. After all, our bonds in the direct portfolio of Depot A meet the requirements of the MSCI ESG Rating in terms of volume to around 99%.
How do you assess corporate loans when companies do not have the appropriate data?
We have a robust ESG scoring system called CredaRate, which we developed collaboratively with other banks. In cases where companies lack the necessary data, we resort to fallback values, such as industry-specific greenhouse gas emissions differentials. These industry benchmarks cover a wide range of sectors. Currently, we have assessed 40% of our corporate loan portfolio, and nearly 90% of our commitments exhibit average or low ESG risks.
Is the scoring model recognized by regulators?
The European banking supervision expects that ESG risks will be appropriately considered in the regular assessment of credit exposures. The revised Minimum Requirements for Risk Management (MaRisk) explicitly mention the use of ESG scorings as a complement to risk classification. Of the two ECB-supervised partner banks involved in the development of the CredaRate ESG scoring, we have received positive feedback for supervisory dialogue.
Thomas A. Lange
If we don't obtain the necessary data in the initial discussion, we acquire it in subsequent meetings, whether it be the second or third conversation.
But in the long run, it probably won't be sufficient to operate with fallback values in the absence of data.
That's correct. But with the first contact with the customer, we try to create the necessary awareness. We have developed an extensive questionnaire to prepare our customers in partnership for the upcoming requirements and support them in data acquisition. If we don't obtain the necessary data in the initial discussion, we acquire it in subsequent meetings, whether it be the second or third conversation. Because decarbonization is a team sport.
Do customers understand this?
Yes, because they also receive similar questionnaires from other banks.
What do you do with credit exposures that do not meet the scoring requirements? Do you cut off the money flow to these customers?
I am responsible for risk management, not environmental policy.
Do you demand higher interest rates from the "climate sinners" among your corporate customers?
We offer pricing based on risk considerations. And as our understanding evolves, we will integrate both the physical risks associated with a changing climate and transitional risks arising from the shift to a carbon-neutral economy into our calculations.