CFOs looking for the black swan on an otherwise clear horizon

Transcription

1 CFO Survey - 3. Quarter 2017 CFOs looking for the black swan on an otherwise clear horizon Deloitte/SEB

2 Contents Executive summary CFO Index Financing Hot topics About the survey 2

3 Executive summary (I/II) CFO Index still at a high level, marginally down from Q1-17 For Q3-17 the CFO Index is at 57.4, which is slightly down from 57.8 in Q1-17. Sustained optimism stems from view on own financial position, lower concern for counterparty defaults and expectations of increased revenue. Pessimism comes from CFO deeming a further OSEBX increase unlikely OSEBX increase and fewer believing in higher margins. A net share of 32% of the CFOs are more optimistic about financial down from 40% in Q1-17, which still indicate high optimism. We believe this is caused by falling housing prices, slightly weaker inflation and disappointing industrial production. CFOs looking for the black swan on an otherwise clear horizon Optimism falls in retail and production Net share optimism within retail and production fall by 54 percentage points (pp.) and 36pp., respectively, possibly explained by disappointing macroeconomic figures in these industries the past months. Retail CFOs also struggle with high competition and poor margins, while production CFOs expect M&A activity to pick up going forward. On the other hand, TMT and financial services are among the most optimistic industries, reporting a net share increase of 53pp. and 31pp. from the last survey. Generally, a positive net share of all CFOs also expect higher revenues and slimmer margins going forward. 3

4 Executive summary (II/II) Focus shifts towards more expansive growth strategies Conservative growth always tends to be a focus area for CFOs. But now CFOs are to a historically high degree looking to expand into new markets and develop new products and services, indicating a moderate, but definite, shift towards more expansive strategies. Factors supporting this shift are high CAPEX expectations, strong intentions to prioritize acquisitions (highest net share recorded) and debt reduction below historical average. CFOs looking for the black swan on an otherwise clear horizon Large increase in availability of capital markets funding CFOs still assess bank loans as the most attractive and available financing source. Further, we find that bond and equity financing have increased significantly in availability compared to Q1-17. However, while bond financing has increased equity financing has fallen slightly in terms of attractiveness. The perceived willingness of CFOs to provide credit is at the highest level since As there is also willingness from corporates to borrow, we may expect to see banks increasing their corporate exposure. No interest rate concerns 62% of CFOs expect interest rates to remain constant and even if rates were to rise, the majority of CFOs intend to keep their strategy unchanged. 4

5 Contacts Andreas Enger Partner, Norway Head of Monitor Deloitte, Norway Thomas Eitzen Head of Credit Strategy Large Corporates & Financial Institutions, SEB Ragnar Nesdal Partner, Norway Financial Advisory, Deloitte Mats W. Gulbrandsen Credit Research Large Corporates & Financial Institutions, SEB 5

6 CFO Index Sustained optimism from strong financials For Q3-17 the CFO Index is at 57.4, which is slightly down from 57.8 in Q1-17. The key observation is a small decline in optimists while some slight pessimists have become more pessimistic. The sustained optimism stems from a favorable view on own financial position, coinciding with lower concern for counterparty defaults and expectations of increasing revenues. The index is muted by stronger pessimism surrounding OSEBX and belief that further improvements in own profitability is unlikely. While our survey in Q1-17 indicated that CFOs would follow prudent strategies focusing on organic growth, we currently see ambitions to increase risk through higher CAPEX and M&A Norwegian CFO Index 40 Norwegian CFO Index Average 6

7 Norwegian CFO Index compared to the Swedish survey Swedish CFOs are relatively more optimistic Swedish CFOs come out as more optimistic in this survey relative to their Norwegian peers. Norwegian CFO Index This is the fourth survey since the 2010 that Swedes are recorded more optimistic than Norwegians and the highest reading since Comparing the current result to historical surveys, it would appear that Swedish CFOs are significantly more optimistic given their past conservative optimism and the high Swedish GDP growth supports this Norwegian CFO Index Swedish CFO Index 7

8 Net optimism share among Norwegian CFOs relatively high, but surprisingly lower than in Q1-17 Optimism high, but not as high as expected A net share 1 of 32% of responding CFOs in the 500 largest companies in Norway are more optimistic about financial compared to six months ago, down from last survey. The decrease is driven by more CFOs going from being neutral to slightly negative. Q: Compared to six months ago, how do you feel about the financial for your company? 49% 36% Net optimism share 40% 32% Lower optimism appear somewhat puzzling, since few macroeconomic indicators imply that Norwegian companies are worse off than in Q1-17. On an EU level, the average 2 increase is 7pp. higher, but both Denmark and Sweden have experienced a similar decrease. Industrial production and inflation have however been somewhat weaker than anticipated by Norges Bank, and could help explain the decrease. 20% 10% -3% 2% 10% 20% Housing prices could be factoring in to the slightly lower optimism, as Norwegian housing prices have decreased since Apr-17, and the construction sector is a driver of Norwegian GDP 3. Lower optimism may also be attributed to a smaller number of CFOs believing the stock market will continue to increase (p.14). -32% -25% -39% -26% 1. The net share is defined as the percentage point difference between positive and negative respondents throughout this report 2. BNP weighted EU average 3. Construction accounts for 16% of Norwegian GDP (Prognosesenteret, 2017) 8

9 Pessimism spreading within retail and production Retail falls of a cliff while production is reduced The general sentiment is positive as no industry have a negative net share of optimism. However, we find sentiment variations among the industries. Retail and wholesale have experienced the largest drop in net optimism, perhaps explained by the unexpected 0.6% drop in Aug-17 retail sales 1, followed by the additional decrease in Sep-17 of 0.8%. The drop was mainly caused by lower activity in the segments of clothing, groceries, pharmacies, gas stations and building materials. Production CFOs also have a less optimistic outlook than in our last survey, which comes as no surprise given a large decrease in the industrial production indicator. From Jul-17 to Aug-17, the seasonally adjusted industrial production indicator fell by 6.2% (only a 0.2% decrease predicted). Construction of ships and oil platforms, the machine industry, data- and electronic equipment was the segments weighing down the indicator. 1. Seasonally adjusted retail sales excluding vehicles, from SSB Q: Compared to six months ago, how do you feel about the financial for your company? 57 % 56 % Retail/ Wholesales 4 % Production/ Industry 20 % Net optimism share 67 % 57 % Oil production/ Oil service Q1-16 Q3-16 Q1-17 Q % 86 % Telecom, media and technology Note that we show the industries that historically has had the highest number of respondents 10 % 41 % Bank/Finance/ Insurance 9

10 while TMT and Financial Services experience increased optimism Retail falls of a cliff while production is reduced Although TMT is tough to explain, given the large variety of business models that could be included, we interpret the clear increase in optimism as related to the rapidly evolving digitization and business technology trends. Increased optimism among financial services CFOs may be explained by two factors observed by banks. Firstly, losses and write-offs from offshore activity were lower than expected 1 and secondly, the interest rate level is, although at a very slow pace, expected to return towards a more normal level. Q: Compared to six months ago, how do you feel about the financial for your company? 57 % 56 % 4 % 20 % Net optimism share 67 % 57 % 33 % 86 % 10 % 41 % Retail/ Wholesales Production/ Industry Oil production/ Oil service Q1-16 Q3-16 Q1-17 Q3-17 Telecom, media and technology Bank/Finance/ Insurance 1. SSB, Aug-17 Note that we show the industries that historically has had the highest number of respondents 10

11 More CFOs expecting moderate product price increases over the next six months Net share increase is driven by moderate product price expectations A net share of 38% of CFOs expect prices on their products to increase over the next six months, presenting the highest level during our historical period. Q3-17 results show that the increase is moderate and driven by both 1) More CFOs expecting a price increase between 1-2% and 2) Less CFOs expecting a price decrease between 1-2%. Interestingly, a net share of 69% and 20% of CFOs within real estate and construction, respectively, believe in a price increase over the next six months. Product prices in these two industries include prices on private property, which has declined continuously since Apr-17. The CFOs optimism is somewhat supported by Oct-17 seasonally adjusted figures suggesting stronger housing prices than feared 1. Q: What is your view of the general price trend for your company s products/services for the coming six months? Net share expecting price increase 34% 25% 16% 15% 11% 8% 6% 29% 38% SSB has forecasted Norwegian housing prices to fall continuously in both 2018 and 2019, until a moderate increase of 1.2% by Similarly, s Norway estimates a decrease in average housing prices of 3.3% in 2018, but a cautious increase in the following two years. 1. DN Q3-13 Q1-14 Q3-14 Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 The figure shows the net percentage of CFOs expecting prices on their own products to increase. 11

12 Highest expectations for revenues since Q1-15 but lower expectations for margin growth, possibly explained by NOK depreciating against EUR Opposite development in expectations for revenueand margin growth Q: In your view, how are revenues for your company likely to change over the next six months? A net share of 66% of the CFOs believe revenues will increase over the next six months, while 32% expect their operating margins will increase. The net share of expectations in revenues is the strongest recording since Q1-15, while the net share in margins is lower than in the past two surveys. The net share of expectations in revenues is driven by both substantial increases, and fewer CFOs expecting moderate decreases in revenues. The net share from p.11 indicates a volume component as well (confirmed by production volume on p.17). The margin growth changes are moderate. Given CFOs price expectations (p.11) and high revenue expectations, the lower margin appear to also be a result of higher cost predictions. NOK depreciating against the EUR, in the past six months may help explain higher expected costs. In addition, CFOs may expect increased labor costs (after three years of historical low wage growth) due to positive for the Norwegian economy (e.g. drop in unemployment rate, higher expected GDP growth over the next two years). SSB estimates a higher, but still moderate, wage growth in 2017 and Q: In your view, how are operating margins for your company likely to change over the next six months? 27% -3% The columns show the net percentage of CFOs expecting their company to increase revenues over the next six months while the line shows the net percentage of CFOs expecting their operating margin to increase over the next six months. Net share expecting revenue/margin increase 17% -10% 12% 5% 34% 13% 54% 41% 66% 32% Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Net revenue increase Net operating margin increase 12

13 Revenue expectations are mixed, while margin expectations decline across all industries Largest change in expectations for margin growth within retail CFOs within retail continue to expect growth in revenues but lower margin growth. The latter seems to be in line with recent analysis. For instance, Varde Hartmark reports that 50% of segments within retail experienced falling gross margins last year. Varde Hartmark attributes squeezed margins to increased price pressure, competition from new global players and more transparent prices due to digitization and online shopping. Projections suggest operating margins will approach zero by 2020, if no significant changes within the industry are made. Q: In your view, how are revenues for your company likely to change over the next six months? Q: In your view, how are operating margins for your company likely to change over the next six months? 85 % Revenue and margin industry split last four quarters (Q1-16 to Q3-17) 50 % 45 % 29 % 29 % 65 % 43 % 43 % In financial services, more CFOs predict increased revenue. Margins are, however, slightly down from last period. Expectations of higher income may be a sign of CFOs expecting growth continuation from first half of 2017 in net interest income (mainly attributable to the decline in NIBOR and unchanged lending rates). In combination with lower lending losses, Norwegian banks have enjoyed strong financial results until Q3-17. A negative net share in margin growth expectations indicates that CFOs expect the high margins to decline, and perhaps stabilize at a lower level. 1. DN Finanstilsynet Sep-17 The columns show six month forward looking expected development in revenues for Q1-16, Q3-16, Q1-17 and Q3-17 and the black line shows the corresponding expectation for the operating margin per industry. 8 % -18 % Retail/ Wholesale Production/ Industry Oil production/ Oil service Bank/Finance/Insurance Telecom/ Media/ Technology 13

14 Still expecting stock market increase Less bullish than in Q1-17 A net share of 15% of CFOs expect Oslo Børs to show a positive development over the next six months. This is down from 29% in the previous two surveys. The lower net share is driven by 33% of CFOs expecting the stock market to increase compared with 42% in Mar-17. Despite a positive view on the business climate, expectations of increasing revenues and stable margins, CFOs are less bullish on the future development of the OSEBX index. The results can be interpreted as CFOs believe in strong economic growth for the industry while further growth in financial markets is limited as we start to see the end of QE by the ECB and balance sheet reduction by the FED. Q: What is your expectation for the Oslo Børs Benchmark Index (OSEBX) development in the next six months? 57% -22 % 22 % 6% Net share expecting increase in OSEBX vs. Actual 13% 13% 14% 5 % 6 % 6 % 37% 12 % 27% 8 % 2 % 0 % -17% 23% 21% -7 % 0% 29% 29% 8 % 10 % 13 % 15% Net share expecting increase OSEBX following 6 months The figure shows the net share of CFOs expecting an increase in the benchmark index at Oslo Stock Exchange (OSEBX) versus the actual development of the index in the six months following the survey publication. 14

15 CAPEX expectations still high, increasing moderately from the past survey CAPEX still expected to increase in most industries The net share of CFOs expecting increased CAPEX is once again high at 28%, slightly up from 25% in Q1-17. Q: In your view, how are capital expenditures (CAPEX) for your company likely to change over the next six months? Net share expecting an increase in CAPEX A net share of more than 50% of CFOs in financial services and real estate expect to increase CAPEX over the next six months. The real estate market is characterized as cyclical with long investment periods and projects lasting over several years. Hence, short-term trends are not likely the motivation behind increased CAPEX. 25% 28% In financial services, however, a possible explanation for increased CAPEX is the more urgent need for IT investments including the transition from physical, staffed branches to internet banking and trading platforms with a higher degree of automation. CFOs within the oil sector expect a CAPEX decrease (net share of -7%). This may seem surprising since the Norwegian State Budget predicts increased oil investments during However, this will be driven by the size of the investments made by the large oil production companies, not the number of companies making investments. Oil service may also be lagging behind oil production in terms of investments. -3% 1% 6% Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q % 15

16 Norwegian CFOs plan to increase staff going forward, however production and oil industries are expecting to see downsizing Production expects to slim staff, yet again together with the oil sector A net share of 8% of CFOs expect to increase employees over the coming six months, similar to 7% in Q1-17. Q: In your view, how is the number of employees for your company likely to change over the next six months? Net share expecting employee increase Retailers surprisingly do not expect to reduce employees, despite a large reduction in optimism (p.9), lower margin expectations and the rising presence of self-checkout machines. Retailers explain that employees will shift from operating cash registers to pure service roles. Within production, negative industry indicators may help explain the hiring as lower industrial production requires a leaner workforce. 8 % 0 % 0 % -20 % 11 % -7 % 22 % 20 % 14 % 6 % In oil, while the net share turns negative, most companies expect no or small changes to staffing. While not shown, we note that construction and real estate intend to increase employees, somewhat surprising given recent pricing development, indicating that the lower prices may carry a smaller economic impact than suspected. Retail/Wholesales Production/ Industry Oil production/oil service Q1-16 Q3-16 Q1-17 Q3-17 Telecom, media and technology Bank/Finance/ Insurance The figure shows net share of CFOs in each respective sector expecting to increase employees over the coming six months. 16

17 CFOs are growing more comfortable in terms of taking risks, shifting towards expansive strategies such as entering new markets and developing new products CFOs more inclined to approach new markets, conservative growth strategies less prioritized Q: Which of the following strategies are likely to be a priority for your company over the next six months? Organic growth continues to be the most prioritized strategy for CFOs, followed by cost reduction and focus on core business, as it tends to be. Despite the latter being one of the most prioritized strategies, strategies involving focus on core business has declined to a historically low level. Instead, we observe that more expansive strategies are preferred. Growth in new markets has nearly doubled over the past 12 months, with retail and production leading the way. Also, new products/services are at a historically high level. 63 % 60 % Prioritized strategies 44 % 34 % 29 % 28 % 26 % 22 % 11 % In sum, these changes imply a moderate, but clear, shift in the CFOs strategic focus. There is a saying within strategy stating that the biggest risk is not taking any risk. In a business world that is changing more rapidly perhaps than ever, there is a need for taking risks in order to meet new challenges and stay relevant. Safe growth strategies could therefore prove to be not so safe, after all. CFOs heading towards more expansive strategies could indicate that Norwegians CFOs finally are growing more comfortable in terms of taking risks. Q3-16 Q1-17 Q % 0 % The figure shows the strategies CFOs think will be prioritized over the coming six months. Note that several answers are allowed. 17

18 More CFOs are stating their main priority for operating cash flow expenditures is acquisitions and increasing cash balance Other investments and increased cash balance preferred CFOs are still expecting their main use of cash flow to be in 'Other investments, which seems to be in line with their expectations of most prioritized strategies being organic growth and cost reduction. Increasing cash balance becomes a more prioritized cash flow usage than debt reduction, indicating that CFOs are more satisfied with their current capital structure. In contrast to the results of the Q1-17 survey, more CFOs expect their main use of cash flow to be used in acquisitions, which is the highest we have measured. An increase in acquisitions is in line with more CFOs approaching strategies involving new markets. Moreover, a drop in debt reduction is also compatible with the observable shift towards expansive strategies, seen on the previous page. By sectors, the largest shift is seen with CFOs within production who now rank acquisitions as their main priority for operating cash flow expenditures (35%), compared to Q1-17 when the area was ranked as least prioritized (6%). Q: What is the main priority for operating cash flow expenditure for your company over the next six months? 11% 17% Acquisitions 19% Shareholder dividends Main priority for cash flow 16% 24% Debt reduction 19% Q1-16 Q3-16 Q1-17 Q % Increase cash balance 21% 28% 26% Other investments The figure shows the strategy most likely to be executed using operating cash flow expenditure for the four most recent periods. 18

19 Expected M&A activity continues to increase and is approaching a normal level in our historical data M&A expectations highest within power companies M&A activity is increasing with a net share of 44% of CFOs believing in higher M&A activity, roughly in line with historical average. Also, as seen on the previous slide, more CFOs intend to use the operating cash flow for acquisitions. Within power and healthcare 1, all companies believe M&A will increase. In the energy sector, falling electricity prices, regulatory matters and large infrastructure investments coming up, could be contributing to the M&A activity, especially within grid distribution. Other industries are distributed fairly evenly, with production highest at a 60% net share. This may be explained by the poor industry performance leading to consolidation. Q: How do you expect the M&A activity in your industry to develop over the next six months? 76% % % 46% Net share expecting M&A activity increase % % 42% % 52% 50% 50% % 36% % Generally, the M&A activity level has been high recently. There were 187 transactions in the first half of 2017, according to Wiersholm 2, and Private Equity funds looking to spend the NOKb 17 they raised in 2016, are contributing to this. CFOs M&A activity expectations likely reflect this. Net share expecting increased M&A activity OSEAX P/E Multiples per end of period 1. Only two respondents 2. DN

20 Financial position declines to below the historical average Financial services and real estate have the most positive assessment of financial position Q: The overall financial position of your company is seen as: (Very favorable, favorable, average, unfavorable, very unfavorable) The net share of CFOs expressing a favorable financial position is down to 61% from 70% (Q1-17). The drop in net share is generated by a moderate increase in unfavorable and a more substantial decrease in favorable. However, the net share of CFO assessments of financial positions is still nearly at the average, implying a situation close to the normal. CFOs are still less concerned with reducing debt, as seen on p.17. In terms of sectors, financial services continue to have the most positive assessment, closely followed by real estate, both having net shares exceeding 90%. Real estate has enjoyed high property prices in the past few years and Norges Bank s risk assessment of the Norwegian financial system ( Financial Stability report 2017 ) confirms that Norwegian banks currently are solid. 84% 54% Net share expressing a favorable financial position 76% 78% 71% Average 60% 64% 55% 58% 59% 58% 48% 70% 61% 20

21 Counterparty defaults are no longer a large concern Defaults to increase somewhat, but slower Few CFOs seem to have a strong view on the question, with 90% assuming no change from previous survey. Of the ones who believe in a direction a small overweight (3%) are expecting higher default rates. Putting the 3% into perspective, the results have over the previous surveys been substantially more pessimistic which is why we can interpret the current result as CFOs being optimistic. Q: The probability for counterparties default in the next six months is expected to: (increase, be unchanged, decline) 31% Net share expecting increased counterparty default risk 5% 24% 3% 8% 14% 20% 30% 13% 16% 5% 3% -7% -11% 21

22 An overweight expecting increased credit spreads, but mostly undecided Marginally bearish on financing costs Q: Expectation of credit spread development next six months Most (75%) CFOs expect credit spreads to be unchanged over the next 6 months and 17% expect an increase vs 8% expecting the spread to go in. From our previous survey, there is a slight increase in CFOs expecting spreads to go in, which is in line with the view of lower probability of counterparty defaults. We interpret the large share of neutrals (75%) as more of a high level of uncertainty, than an exact estimate of spread movements % 49 Net share expecting increased credit spreads % 19 % 16 % 34 7 % 4 % 4 % 13 % 9 % With CFOs seeing bond market attractiveness at a high level, a slight negative stance to bond spreads makes sense % % % Their view could also be interpreted as a reaction to the strong compression in credit spreads the last 12 months at some point spreads will come out again. -34 % % Net share expecting increase Credit spreads following 6 months Figure shows the net share expecting increased credit spreads over the next six months and the actual credit spread development over the same period 22

23 As fundamentals appear solid a rising share fear the unknown Costs and political risk trumps traditional dem Traditional demand and supply factors continues to decline as a risk factor according to Norwegian CFOs. Competition from abroad appears less of a risk and falling domestic demand remains a relatively small concern compared to historical surveys. From our previous survey we see that CFOs to an increasing degree believe financial markets pose risks and concerns about political changes continue to be a significant risk. In terms of financial markets, it is foremost rising interest rates which stand out as a risk while commodity prices appear less of a risk. The results matches an economy with improving economic growth in which higher interest rates emerges as a natural reaction. Increased focus on higher interest rates may be a result of a business climate with lack of apparent risks which may also explain the increasing share of CFOs responding Other risks. Q: Which of the following factors are most likely to pose a significant risk for your business over the next six months? Largest concern going forward 45% 42% 34% 23% 8% 15% 10% 23% Supply/Demand Cost Financial markets Political and Other Q1-16 Q3-16 Q1-17 Q

24 Large increase in availability of capital markets funding Funding availability supports growth As outlined previously in this report, CFOs are to a larger degree planning to increase CAPEX and grow through M&A. We believe that the relatively more available and attractive funding market supports the CFOs growth ambitions. Q: How attractive are the following financing sources for Norwegian companies given the current market situation? Q: How available are the following financing sources for your company given the current market situation? Attractiveness and availability of financing sources Bank loans is still the most attractive and available financing source according to the CFOs in this survey. We also find that bond and equity financing have increased significantly in availability compared to six months ago. However, while bond financing has increased equity financing has fallen slightly in terms of attractiveness. It is interesting to note, however not surprising, that CFOs responding that bond financing is very attractive also respond that bank financing is less attractive and easily available. 58% 68% 44% 36% 35% 25% Bank loans Bonds Equity Attractiveness Availability The figure shows the net share of respondents describing each type of funding as attractive or available 24

25 Perceived willingness to provide credit at highest level since 2011 Bank loans are generally considered available CFOs in our survey are responding that bank loans are readily available. The results are mainly driven by a reduction in CFOs saying bank financing is unavailable. Q: How attractive / available are bank loans as a financing source for Norwegian companies given the current market situation? 84% Bank loans - Attractiveness vs. Availability As bank loans are viewed as both available and attractive, there seems to be a willingness from both banks to provide credit and for corporates to borrow. Therefore, we may expect to see banks increasing their corporate exposure. It would seem as banks share the views of CFOs in terms of counterparty risks (previously in the survey) as significantly fewer CFOs perceive bank loans as being unavailable. 42% 24% 17% 18% 25% 52% 56% 65% 67% 30% 63% 59% 68% 66% 53% 39% 44% 54% 48% 59% 60% 75% 64% 59% 55% 58% 58% Attractiveness Availability 25

26 Bond market is generally perceived as attractive Bond market activity set to increase? The attractiveness of the Norwegian bond market as a funding source has increased significantly over the last 12 months. This is driven by a combination of an increased share of CFOs finding it attractive and a reduction in respondents finding it unattractive. There has been a relatively low supply of corporate issuers in the Norwegian bond market over the last couple of years (excluding the recent Norsk Hydro issue). Given that a majority of CFOs responding that bond financing is attractive are representing corporates, we may see increased activity in the bond market over the coming year. Q: How attractive / available is bond funding as a financing source for Norwegian companies given the current market situation? 41% 55% 54% Bond funding - Attractiveness vs. Availability 50% 59% 20% 40% 49% 54% 42% 54% 10% 14% -1% -13% 26% 40% 44% 9% 33% 36% -30% Attractiveness Availability 26

27 High willingness to use the stock market Expect larger investments to be equity financed While we have seen a slight decline in the attractiveness of the equity market, we observe the second highest result since the start of the survey. Q: How attractive / available is equity as a financing source for Norwegian companies given the current market situation? Bond funding - Attractiveness vs. Availability At the same time we observe the highest reading in terms of availability of equity financing. The combination of both availability and attractiveness may lead us to conclude that CFOs will more actively use the equity market to fund growth plans. 19% 25% We believe that minor CAPEX projects and acquisitions can be funded through bank loans or the bond market while larger acquisitions and investments will entail equity financing. Hence we believe activity in the equity market will be dependent on a combination of the relative attractiveness of the equity market and the size of investments programs. 27% 26% 24% 29% -11% -12% 0% -3% 25% 20% 11% 16% 6% 0% -9% -13% 21% 8% 49% 35% Attractiveness Availability 27

28 A surprisingly large share of CFOs expect higher interest rates Norges Bank and Norwegian CFOs are mostly aligned about interest rates Q: What do you expect will happen to interest rates in your country over the next 12 months? 62% of respondents believe in unchanged interest rates over the coming 12 months while 36% expect higher rates. 36% of Norwegian CFOs expect higher interest rates over the coming 12 months which contrasts with the Norges Bank s rate path. The rate path indicates that the first rate hike will come no sooner than the first half % 36 % We find an overweight of CFOs in the financial and real estate sector expecting higher rates. This finding coincides well with CFOs in the financial sector expecting an improved business climate while no respondent representing real estate / construction expect any weaker business climate. 62 % The interest rate will decrease The interest rate will increase The interest rate will be unchanged 28

29 CFOs do not appear to be worried about increased interest rates An interest rate increase will not heavily impact CFOs strategy 52% of CFOs will, given higher interest rates, either not adapt their strategy correspondingly or already have a strategy in place that takes an interest rate hike into account. Another 17% simply do not believe interest rates will increase. 9% of CFOs will in such a scenario, reduce debt. Q: If interest rates were to rise in the next 12 months, which of the following strategies do you think is most appropriate for your business? 17 % 1 % 3 % 7 % 1 % 2 % 3 % We believe the most plausible explanation for these answers is founded in the moderate interest rate exchange expectations in the market. It could take several years before interest rates become high enough to severely impact their company. Also, companies holding interest-bearing assets will receive a similar gain if rates increase, as confirmed by that 11% of financial services companies will increase debt if the interest rate is raised. Construction, real estate and energy are the sectors most likely to reevaluate future investments with an interest rate increase. Construction and real estate may be particularly cautious as higher interest rate will impact both their financing costs and lower demand for their products. The same trends can be observed in Denmark, Sweden and the EU, where slightly over 50% will not change their strategy over an interest rate hike. This is therefore a European trend, and not specific to Norway. 52 % 9 % 4 % Other Revaluate investment plans Hedge Adapt production plans to cope with changes in demand Reduce financial gearing Reduce debt Refinance debt Strategy remains unchanged - a rise in interest rates will have little impact on my business Strategy remains unchanged - we do not believe interest rates will rise Increase debt 29

30 About the survey General information The target group comprises of the CFOs in the 500 largest companies across industries in Norway. The purpose of the survey is to trace the development of the CFOs perception of economic, represented among other by company risk, financing and future revenue potential. Moreover, the survey aims to determine important indicators for the general economic development. Deloitte and SEB have conducted separate surveys for several years, however the CFO Survey for Q3-16 was the first survey conducted in cooperation. This survey was carried out as a web-based questionnaire in Sep-17. Historical figures presented are based on previous bi-annual surveys dating back to Q1-11. In total, 149 CFOs across key industries responded to the survey during the period 26 Sep. 3 Oct Given the broad range of industries and organisations that responded, the survey presents a transparent, up-todate image of the financial situation facing the wider Norwegian CFO community. Industry % # Retail / Wholesale 17% 26 Production / Industry 13% 20 Banking/Finance/Insurance 11% 17 Oil Production and Services 9% 14 Real Estate 9% 13 Transportation 7% 11 Construction 7% 10 Other 7% 10 Energy / Pow er Production 6% 9 Advisory / Services 5% 8 TMT 5% 7 Public sector 1% 2 Healthcare 1% 2 Employees % # employees 17% employees 22% employees 21% employees 30% 45 > employees 9% 13 Please send us your feedback together with any suggestions for improvement to help us ensure that the Deloitte/SEB CFO Survey remains an essential resource for your work. 30

31 SEB is a leading Nordic financial services group, guided by a strong belief that entrepreneurial minds and innovative companies are key in creating a better world. We are here to help them achieve their aspirations and succeed through good times and bad. We care for ambition. In Sweden and the Baltic countries, SEB offers financial advice and a wide range of financial services. In Denmark, Finland, Norway and Germany the bank s operations have a strong focus on corporate and investment banking based on a full-service offering to corporate and institutional clients. With capital, knowledge and experience, we generate value for our customers a task in which our research activities are highly beneficial. Macroeconomic assessments are provided by our Credit Research unit. Based on current conditions, official policies and the long-term performance of the financial market, the Bank presents its views on the economic situation locally, regionally and globally. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte Norway conducts business through two legally separate and independent limited liability companies; Deloitte AS, providing audit, consulting, financial advisory management services, and Deloitte Advokatfirma AS, providing tax and legal services Deloitte AS 31