Asiamoney: trade finance banks emerge from difficult years

Asiamoney Trade Finance Report, May 2011

Trade finance banks have suffered a challenging few years, first hamstrung by the liquidity crunch during the financial crisis, then sideswiped by the draconian draft Basel 3 regulations designed to stop such a crisis happening again. But in Asia at least, the business has emerged buoyant and growing.

Across the industry, bankers are making cautiously positive noises. Citi says that it in trade finance in Asia it doubled its assets last year. “And this is not off a small base,” says Ravi Sexana, head of trade services, global transaction services Asia Pacific at Citi. He says that growth is likely to continue all year. “There is very strong demand, both across financial institutions – who then feed their corporate customers – and directly to our corporate customer base.” At Standard Chartered, “these are actually excellent times,” says George Nast, global head of transaction banking products. “We’re seeing very strong growth in our trade finance business, and it’s across the board: all of our geographies that we operate in Asia, Africa and the Middle East have rebounded faster than more developed parts of the world.” And at JP Morgan Treasury Services, Pravin Advani, global trade executive for Asia, is “pleased to report that we are seeing significant growth across our trade finance business. Trade volumes are up, clients are coming on board and our team has never been busier structuring and implementing solutions for our clients.”

Why? Partly, it’s about Asia itself. “There has been a very interesting landscape change in Asian trade,” says Anand Pande, head of product management at RBS. “Intra-Asian trade has changed: you are looking at components getting sold from one country to another intermediary for production, to another for final assembly and then out of Asia.” What does this mean for trade finance banks? “Earlier there was a simple mantra of Asia-US, Asia-Europe, whereas now it’s getting more complicated,” he says. In terms of product development it means “making a new picture. We have to look at patterns in cash and trade and come up with a recipe which gives the clients solutions that work for them.”

Advani says that as the global economic recovery gathers pace, Asia Pacific, which has always been a major trade market, “is emerging as a driver of trade across the globe. As companies across the region build their business, both in terms of deepening their domestic presence and broadening their platform internationally, we’re seeing a marked increase in demand for both traditional trade finance solutions through to the most complex, multi-market solutions.”

Bankers describe a combination of a revival in straightforward and long-standing business, and a push into new areas. “On one hand the newer types of products, like financial supply chain, are gaining more traction across Asia,” says Venkatesh Somanthan, director and trade finance head in global transaction banking at Deutsche Bank. “There has also been a strong impetus and growth in classical trade business: documentary trade, issuance and negotiation of LCs.” In terms of newer business, financial supply chain is the stand-out, he says. “You require the financial element to be well-oiled and seamlessly working. Increasingly companies have this as a KPI among their treasury team: ensuring that they have a robust financial supply chain.”

Nast at Stanchart refers to “the return of open account business. That contracted for many players during the crisis as trade moved back to more documentary-type settlement, but now open account trade has come back to be the fastest growing area of the business.”

“Particularly with open account, a lot of the momentum is tied to events in the global economy,” Nast adds. The trade that underlies Asia is supply chain driven, he says, making solutions around the chain a particularly high-growth area. “We are seeing Chinese companies looking to expand their base of buyers in Asia and Africa; supplier and buyer-related finance has been a fast growing part of the business.”

Another area of growth is good old-fashioned commodities, Nast adds. “It’s an area we are investing in and growing. A combination of volumes and the underlying prices of commodities will really grow the value of that business.”

At Citi, Sexana sees the same combination of old and new. Areas of growth include “vanilla forms of trade finance, such as helping a customer finance their imports.” With dollar rates low and not obviously appreciating, many companies in Asia prefer dollar financing now, he adds. And other traditional growth areas are making a reappearance. “On the documentary side, trade terms are extending and you are seeing a lot of LC discounting coming back into vogue,” he says.

Vanilla forms of the business are helped by the fact that spreads have dropped considerably from their peaks about 18 months ago, but are “well above the days of abundant liquidity, so it still makes sense for banks,” he says.

In addition to the traditional product, Sexana sees growth in structured businesses too. “The whole supply chain space, where you’re not just giving money to an entity but looking at how you can help their suppliers and get customer risk off the books – that is becoming very significant in size,” he says. On top of that are off-balance sheet customers, who are not just looking for liquidity but a working capital benefit.

While most of this momentum sounds traditional, Sexana disagrees. “The whole structured trade space is new,” he says. “The supply chain is new, the whole asset distribution and customer supply angle – these are all new trends.”

JP Morgan sees particular growth in China, “a significant opportunity to go deeper and wider with our Asia-based corporate and financial institution clients”, as well as India, Korea and some Asean markets, Advani says. The bank recently signed an export credit insurance LC policy agreement with Sinosure in China, the first by a bank headquartered outside Asia. “It provides Chinese companies with financing for their trade finance operations, while delivering better efficiencies, reducing their costs and mitigating their risk, assisting them as they grow their business in new and emerging markets around the globe.”

“Generally speaking, the region’s universe of clients continues to depend on trade finance to support business growth, as it has for many years,” Advani adds. “Trade itself is a long standing business, and now more than ever relies on innovation – or rather the innovative application of fundamental concepts of lending and risk management – to remain fresh, relevant to clients and pertinent to today’s market challenges.”

Bankers tend to highlight the increased importance of risk management since the financial crisis. “We see that there is now a much greater realization from clients of the inherent importance of a comprehensive and prudent risk management approach, which is a natural fit for trade,” Advani says. Another common theme is a request for trade solutions that accommodate the different regulatory positions in the region, and provide some level of standardization among them. “It’s not always an easy balance to strike,” Advani says.

Hiring trends vary. Citi’s regional trade finance business today has 25 people, having roughly doubled in the last 18 months. Others have shifted existing resources around – “using our resources optimally by reallocating towards new opportunities in an ongoing process across the region,” is one fabulously convoluted description, by a bank that shall remain nameless – or started hiring in targeted ways. Pande at RBS says new hires are centred on the big countries that provide revenues, “because revenue generation is where the battle is won and lost.” In practice, that has meant big new hires in China. At Stanchart, Nast says: “We have a pretty stable business so I would say it is selective in the specific capabilities that we want.” And Advani says JP Morgan has made “a significant number of new hires and internal transfers in our trade business,” with new trade finance heads in China and India, and new regional advisory and solutions delivery teams to support supply chain and structured solutions.

So are the liquidity problems of the financial crisis gone for good? Not everyone is so sure. “One of the biggest challenges is liquidity,” says Pande at RBS. “Asia has high inflation; central banks not just in China but all over the world are increasing reserve ratios; and domestic markets are getting squeezed for liquidity. So what people want [from trade finance banks] is products that ease liquidity. ”

Advani says the liquidity issues have “largely abated,” notwithstanding problems like Europe’s sovereign debt problems. “However, while liquidity has re-emerged at a macro level, at a local level there are still areas of imbalance caused by varying regulations, currency controls, varying rates of economic growth, and myriad other reasons.” For Nast’s part, he says: “I don’t think we’re back to where we were before the crisis, but certainly liquidity has returned to the market and competitors are back. So I would say the liquidity and credit environment is quite positive.”

Besides, while liquidity can still be a challenge, it’s also an opportunity for new business. “When we talk to our clients, liquidity management is still a very important concern of theirs,” Nast says. “They have lingering memories from the crisis, and they respect a bank like ours who stood by them in the crisis when others pulled out. They are very focused on solutions to ensure they have the working capital finance to help them grow, but also maintain their liquidity in case something else goes wrong in future.”

Generally, the mood is of a business environment considerably changed, but still positive. “If you look at the forces in the world right now applying to the trade finance business, one is deleveraging; another is how the US and Europe come out of their challenges; a third is the inflationary environment in Asia; then how governments react to things like capital controls; and finally the physical stimulus happening, such as infrastructure development in Malaysia and Indonesia,” says Pande. “A lot is happening to drive growth, and those are the five plays which will basically position and shape the trade finance business in the coming years.” It is, in sum, cause for optimism, as Sexana says: “There are really a lot of tailwinds for the business. Every bank is experiencing double digit, high teens asset growth as par for the course on trade.”

But at the same time, it’s a more complex environment than existed before the financial crisis. “There is no return to the ‘normal’ of the pre-crisis world,” says Advani. “The environment today is more complicated for banks, and for our clients. There are new hurdles to clear, and new opportunities.”