Hedging for SMEs

Banesto’s Jose Llado has found a niche in providing hedging solutions for the bank’s small to medium-sized corporate client base. With its strong retail client base and sophisticated risk management system, Banesto has been able to steal a lead on its rivals, which have, so far, ignored this market.

Banco Español de Credito’s (Banesto) Jose Llado has made it his business to service the hedging needs of Spain’s small and medium-sized (SME) corporate market. He joined the bank – Spain’s third largest in terms of managed resources and a part of the huge Santander Central Hispano (SCH) group – as head of its derivatives sales and trading business in April 2001. Since then, he has opted to transform the bank’s treasury products business – covering derivatives sales, trading and asset and liability management services – into the biggest servicer of Spain’s SME corporate market.

“Our success is that we have offered hedges to both large and small corporates. We have taken on the smaller entities disregarded by the larger banks,” says Llado. Indeed, the derivatives sales and trading group he is in charge of has doubled revenues year-on-year since 2001, and is by far the biggest provider of treasury services to the SME market in Spain, he says.

Llado joined the bank from the Spanish branch of Chase Manhattan, where he headed the largest non-Spanish treasury sales department in Spain at the time, with annual revenues of around e50 million a year. Llado’s first task at Banesto was to educate SMEs on how best to optimise their borrowing strategy using simple derivatives, such as interest rate swaps, to hedge against future rate movements.

“Banks have never shown these companies the risk that rates will go up and down. We show them that there is the possibility of hedging against this,” says Llado.

With a much smaller number of multinationals than other developed European countries, Spain’s industrial base is grounded on the SME sector. But most larger banks have tended to ignore their asset and liability management requirements. Until recently, most of the funding done by SMEs had been of a short-term nature, and there was little attention paid to their long-term risk management requirements.

“The problem for the small and medium-sized companies is that they only had access to six- or 12-month borrowing, even though they had long-term plans,” says Llado. However, times are changing, and the sector has received greater prominence in recent times, boosted by the government’s Fondo de Titulizacion (FTPYME) Ministerial order. This came into effect in 2003, and authorised the Spanish Treasury to act as a monoline for all SME collateralised loan obligation securitisations, with the proviso that the issuing bank reinvest 80% of its proceeds from the bond issuance back into SME loans, boosting liquidity in this sector. These days, funding has become slightly longer, says Llado, as Spanish corporates have started to adopt a more international model.

But even three years ago it was a different story. Llado’s focus on joining Banesto was to increase the derivatives sales and trading business by tapping into the bank’s already large SME client base. His method was to keep the service simple – most of the hedging products that the bank sells are plain vanilla swaps and currency derivatives – and to tailor these to the individual requirements of the smaller institutions. Hence, Banesto has transacted swap hedges ranging from a maximum of e100 million notional for larger organisations to as little as e300,000. The bank has so far closed more than 1,000 SME deals, says Llado.

The group’s success is founded on the close attention it offers to its clients. For instance, says Llado, Banesto offers free consultancy services to prospective clients, and will aim to maintain a close relationship with corporates with which it has entered into a transaction. Hence, says Llado, the bank carries out daily revaluations and offers continuous position analysis over the life of the deal. “We always look to help with future risk management problems,” says Llado. “We do not close and forget but will be with the client until the day the hedge dies.”

Given its chequered past, namely the collapse of the bank in 1993, when Banesto’s chairman, Mario Conde, and nine other directors were charged with defrauding the bank, risk management is a priority. “Obviously risk management is important because of the bank’s history,” says Llado. “But there was definitely a change in the bank’s approach – this was one of the goals we had.”

And with the large derivatives exposure it has on its books, position monitoring becomes a complex activity. “The huge number of transactions we have on our books means we need a very strong straight-through processing system,” says Llado.

The bank has a sophisticated in-house pricing system that utilises technology from risk management software provider Murex. Llado adds that Banesto’s technological system has won praise from the Bank of Spain as being the best in the business. And he says that its huge number of clients does not affect the bank’s risk management activity. “If you do it well, it does not matter if you have 20 or 20,000 clients.”