A combination of new global capital rules and sovereign debt problems has had multiple ramifications for banks based in Europe. One has been an urgent need for lenders based in Europe to cut their debts and raise money.
Doing this has forced some tough choices on many European banks, one of which has been to withdraw. Asia has not been immune to this. But what’s disappointing for European lenders has offered a golden opportunity for its rivals in this region.
The reason for this is that regional banks have been able to fill the hole that their European peers have left.
“With the Europeans banks withdrawing support, though not completely, this has created opportunities which are being filled by local, r egional and those international banks which recognise that trade is driving the global economy forward,” says Simon Constantinides, regional head of trade and supply chain for Asia Pacific at HSBC.
In the first quarter of this year, four of the region’s top five providers of trade finance by market share were Asian or Asia-focused international banks, according to data from Dealogic. Last year, only one of the top five was an Asian-centric international bank – HSBC.
“We have seen a lot of competitors in the last couple of years and with the European banks pulling back, Asian banks or US banks that have dollar liquidity have been able to fill that gap,” says Michael Vrontamitis, head of product management for transaction banking at Standard Chartered to Asiamoney. “It comes down to the strength of the balance sheet and what is really important are the basics of banking – liquidity and capital.”
Japanese lenders have been the regional frontrunners, according to Dealogic’s data. Mitsubishi UFJ Financial Group is now ranked first in the region by market share with 16.6% of the market in the first quarter, up from a 5.5% share last year. Sumitomo Mitsui Financial Group more than doubled its market share to 9.6%.
In contrast BBVA, the Spanish bank, fell out of first place as its market share fell from 15.1% to 4.7%. The bank declined to comment on the reasons for the drop.
For Asia’s banks, the retrenchment of their European peers offers an unparalleled opportunity to consolidate their own trade finance businesses.
Back in fashion
For years trade finance, which falls under the umbrella of transaction banking, was a necessary but not particularly fashionable part of banking.
While financing the purchase and transport of goods was part of the nuts and bolts of any corporate bank worth its salt it attracted little attention during the days when financial institutions could make far more through making and hawking more complex and risky products.
Post-financial crisis of 2008, banks across the world have rediscovered their appreciation of trade finance. The reason is simple: amid more rigorous capital regimes and market volatility the world’s lenders are desperate to avoid risk and eager to earn steady revenues from safe activities. Trade finance products perfectly fit this need.
The products designed to fund trade are generally short in duration – usually 180 days or less – with uncommitted facilities. The short duration enables banks to manage their balance sheet more effectively and nimbly. It’s relatively safe too. There were fewer than 3,000 defaults from 11.4 million trade finance deals, less than 0.03%, according to analysis by the International Chamber of Commerce (ICC).
“In order for the world to keep growing, you still need trade,” says Standard Chartered’s Vrontamitis. “In the 2008 crisis, you actually saw a lot of clients switch to more secure methods of payments.”
This appeal continues today. Banks are eager for a share of an annual revenue pot of approximately US$27 billion, according to Oliver Wywan estimates, and access to fast-growing emerging markets.
“You are tying it to the cash cycle of the borrower and that allows us to have better insight and control over the risk management side as we know what should happen and when,” says HSBC’s Constantinides. “Because of that, leveraging a trade finance product with more discipline today provides a risk-weighted, asset-friendly structure versus a straight working capital loan structure.”
Banks that focus on trade finance feel that this lending profile means that they can weather through another financial crisis because such an environment would lead to a growing need for more secure forms of funding.
“In times like these when there are tighter regulations, more capital required, customers feel constrained and trade finance becomes more relevant than before,” says Anand Pande, global head of trade product management and head of transaction services product for Asia at Royal Bank of Scotland (RBS). “These companies need these kinds of solutions to be in the game, and being in the game means coming out better than their competitors.”
Intra-regional links
The increased interest in trade finance is fortunate, because its importance to the world’s economy is only growing.
The market for trade finance products across the globe is estimated to be worth US$10 trillion a year, and it supports 80% of global trade. It is also predicted to grow by up to 30% over the next two decades, says Standard Chartered.
Asia represents around 20% of global trade finance, and the industry has been growing quickly too. According to the World Trade Organisation, Asia has the second largest intra-regional trade after Europe, resulting in 53% of trade that is directed to Asian countries in 2010. Also, intra-Asia trade has surged 11.8% since 2000 to reach almost US$2.5 billion in 2010.
According to a report by McKinsey, trade and transaction banking services for the region are expected to surge 77.4% from US$168 billion in 2010 to US$298 billion in 2015.
“Our general observation is that the rate of growth for Asia ever since the global financial crisis in general has been at a steady clip compared to the more developed world,” says Neil Daswani, global head for strategic client coverage group at Standard Chartered to Asiamoney. “Some major engines of growth – with China being the obvious one – have substantial supply chain ecosystems that are now truly embedded and have taken shape for a couple of decades within the Asean (Association of Southeast Asian Nations) region.”
The expansion of regional trade even last year suggests that the withdrawal of European banks has not had any real impact on the growth of trade finance in the region, despite them having historically made up a large part of the sector.
New players are entering the business and existing ones are adding resources, all eager to tap into the boom in trade between Asian markets that drives global economic growth.
HSBC is already the market leader with 9% of the global trade finance business and it has revved up its focus. The bank’s trade finance revenues jumped 23% last year to US$3.2 billion, helped by new deals in commodities.
Singapore’s banks have also been major beneficiaries.
OCBC for example has seen its customer base grow by 20% and its transaction value triple between 2009 and 2011. Total trade assets have also increased eightfold and growth in the area of export letter of credit (LC) outpaced the markets’ by two times in 2011 alone.
DBS reported that trade finance accounted for half of its loan growth last year. The bank’s global transaction business has grown from 10.5% of total revenues in 2010 to 14.2% in 2011, resulting in a 47.6% jump year-on-year from US$745.5 million to US$1.1 billion respectively, according to its financial statement.
“The driver for this growth is the [growing] domestic consumption throughout Asia, especially China and Indonesia,” says Tom McCabe, head of global transaction services to Asiamoney. “DBS is diversifying earnings out of Hong Kong and Singapore, and one of the ways of taking advantage of the growth in other countries is by growing the global transaction banking business.”
Channels of trade
Part of this growth is down to traditional trade, with Asian countries manufacturing and exporting goods to Western nations. But it is also down to expanding channels of trade within Asia, and between countries in the region and other countries.
The rising south-north channel of trade in Asia is well known, in which south-east Asian countries ship large quantities of resources to North Asian economies such as China and Japan.
Another channel of trade that is fast-growing is between the emerging markets of Asia, Africa, and Latin America, known as the ‘south-south trade’. Trade between Asia and Latin America in particular has been growing 35% faster than trade between other regions, highlight analysts.
“We have Asian companies – mainly Korean and Chinese entities importing commodities from Latin American countries,” notes Derek Mui, head of transactional trade finance Asia at BBVA. “On the other hand, we can see how Chinese, Korean and Japanese companies are exporting finished products like electronic appliances, industrial machineries to Latin American countries like Mexico, Brazil or Chile.”
These new channels could well prove important, because global trade as a whole is facing headwinds. Europe's ongoing sovereign debt crisis and the aftershocks of events such as the Japan earthquake and Arab Spring are expected to slow the growth in global exports to just 3.7% in 2012, according to a World Trade Organisation (WTO) report released on April 12.
"More than three years have passed since the trade collapse of 2008-09, but the world economy and trade remain fragile," says chief Pascal Lamy at WTO in a press release on April 12. "The further slowing of trade expected in 2012 shows that the downside risks remain high. We are not yet out of the woods."
World trade expanded by 5% in 2011, a sharp deceleration from the 2010 rebound of 13.8%, and growth will slow further still to 3.7% in 2012, before recovering to 5.6% in 2013, added the report. Multiple economic setbacks during the year dampened growth beyond expectations and led to a stronger than anticipated easing in the fourth quarter, said WTO.
Despite the slowdown in global trade, transaction banking specialists are still confident trade finance products will continue to be in good demand, especially amid market uncertainty.
Developing economies in particular are expected to lead the growth in goods traded this year with a forecast 5.6% increase in exports, compared to 2% for industrialised nations.
Being exposed to the growing trade levels between these markets is going to prove particularly important for Asia’s trade financiers.
