As Europe's banks come to terms with the economic impact of Basel III's rules on capital requirements, their demand for trade finance deals in Latin America through the International Finance Corporation has waned. But this leaves the door open to North American and Asian banks looking to increase their presence in the region.

The trade finance programme of the World Bank’s International Finance Corporation (IFC) aims to match emerging market banks that require financing for their corporate clients’ trading activity with lenders who are looking for partners in those markets but wish to have the security that IFC involvement offers. In boom years, when lenders are in expansionary mode, taking on such an arrangement is an easy choice. In recessionary years, and at a time when the leading trade finance banks have limited liquidity and are subject to heavier capital constraints, the search for new markets or partners tends to come much further down the agenda for banks, with or without the assistance of the IFC.

Antonio Alves, the head of the IFC’s short-term lending division for Latin America, has seen such changes happen from up close. He says: “Before [the crisis], it would take us three to four calls [to find lender banks]; now we need to make between 10 and 20 calls.”

The IFC’s programme represents a small percentage of the total trade finance market – last year it accounted for about 7% of the $21.8bn total volume of deals in Latin America. However, it is highly indicative of the mood of lenders.

Europe's fading appetite

European banks have traditionally been the most frequent users of this programme, but heavier capital requirements in Europe, as a consequence of recently introduced Basel III rules, mean a higher level of capital must be allocated to a trade finance transaction even if, as practitioners point out, trade finance is a low risk-weighted product. Because of the tougher capital requirements, analysts expect that European banks may shrink their balance sheets by a combined total of between €1500bn and €2500bn over the next 18 months. Lenders that do not have a funding base in Latin America are the ones that will most likely reduce their involvement in the region.

Looking at league tables, European banks’ shift away from trade finance deals is not immediately clear, as all banks are still in the process of re-adjusting their business strategies. However, on an anecdotal basis, there is widespread comment on the lower activity from European banks.

In Brazil, the country in which about half of the trade financing deals in Latin America originate from, Clovis Ikeda, Santander Brasil’s head of global transaction banking, has observed this trend. Some European banks are considerably less active, says Mr Ikeda, even in export credit agency finance deals – which has been an area dominated by French lenders in particular – while North American and other international banks continue with similar levels of participation as in the past. BNP Paribas, the highest ranking French bank according to league tables by data provider Dealogic, declined to comment on this article.

Brazil Mandated Arrangers of Trade Finance (Including bilateral loans)

Opening up the market

This change has created opportunities for other international and local banks. “We see competition from HSBC, which continues to be a very strong player, JPMorgan, Citi, Bank of America; and then of course we see Brazilian banks such as Itaú, Bradesco, Banco do Brasil – they are moving from [being] short-term lenders to more sophisticated lenders in trade finance,” says Mr Ikeda.

Sustained demand for trade finance deals has also contributed to the expansion of the loan books of large US banks, which registered a peak at the beginning of this year for Citi and JPMorgan. Citi’s head of trade for Latin America, Renato Faria, says that after the constraints and re-adjustments imposed by the financial crisis, his division is growing again, although greater attention has to be paid to the quality of assets. “We are very careful about the quality of assets we are generating, the kind of returns we are getting in our portfolio, and since the fourth quarter of 2009 we have come back to business as usual,” he says. “We have grown a lot but we need to grow with quality.”

Mr Alves confirms that the appetite of European banks has diminished and that there is a more focused approach to deals. “The number of players in trade finance, on the lending side, has reduced drastically. Last year, before the European turmoil, we had 10 to 12 European banks providing funding to Latin American banks through our programme. Today, from Europe, we have two,” he says.

Mr Alves adds that even if most European banks have interrupted their participation through the IFC, they are likely to be active in the region but with a more targeted approach, dealing directly with local banks they know and with which they may develop business in other product areas. “Sometimes those [European] banks have credit lines directly with emerging markets banks, so now they focus on client relationships rather than leverage additional business,” says Mr Alves. “Those clients tend to be [Latin American] banks that provide a steady flow of business, and that have other products with the lender.”

Pricing rise

The reduced appetite from one group of lenders has not had a drastic impact on the market, as other groups have maintained, or even increased, their level of participation. However, if financing has still been available, the terms have changed and prices have increased.

“I don’t think that there is a severe scarcity of liquidity in the market. I have never heard of a company that wanted to finance a trade flow and was not able to do so,” says Mr Faria. “But prices have increased substantially. There is less liquidity, therefore prices have increased.”

As lenders have understandably become more selective with the deals they choose to finance, and prefer to get involved in transactions that are considered safer, clients have also become more risk averse, and have been looking for products to mitigate risk.

HSBC’s head of trade and receivables finance for Latin America, Luiz Simione, says that corporates have been looking into trade finance-related products that offer risk coverage, such as documentary credit (DC) transactions, for example, whereby immediate payment is received on presentation of shipping documents. These documents prove that an importer has the ability to pay for the goods and transfer the payment risk to the bank that has issued them. “[We have seen] more demands from Latin American importers to issue DC due to deterioration of the risk environment in general,” says Mr Simione.

Latin America Mandated Arrangers of Trade Finance (Including bilateral loans)

SME opportunities

The availability of financing and deals’ favourable terms are usually not an issue for large corporations that are well known internationally and have strong credit ratings. The situation is very different for the growing number of smaller companies in need of trade finance.

Roberto Bravo, BBVA’s head of corporate, institutional and trade finance for South America, anticipates that there will be a greater presence of small and medium-sized enterprises (SMEs) in trade deals, especially between Latin America and Asia. Mr Bravo plans to cater to this segment with advisory and other services that will help these companies access better credit terms and work more comfortably with a product that they do not necessarily know well, as many of these SMEs may not have dealt with foreign trade before. Further, the strength of the so-called South-South trade flows means that getting accustomed to dealing with the Asian markets, in particular, is not only crucial for large companies. 

“[Beside from financing] our focus will also be on ancillary services,” says Mr Bravo. “SMEs will become more relevant [in trade deals], as will trade with Asia – [which] will require additional advisory services for SMEs, too.” 

Asian links

Others are tapping into the growing flows between Latin America and Asia. Citi, for example, has recently set up a desk in Shanghai to support its Latin American clients in their trades with China. The desk is meant to offer advisory services on market practices but also helps with funding issues, leveraging on the bank’s correspondent banking network.

Citi’s Mr Faria highlights the importance of supporting Latin American clients when dealing with China and Asia in general as the South-South trade flows are still relatively new, as opposed to the well-established trades with Europe and the US.

There is also a growing interest from Asian banks to get involved in deals financing trade with Latin America, taking advantage of the gap being left by European lenders. “Asian institutions are really keen to increase their presence in the region,” says Mr Alves. 

Of the 20 banks active in the IFC’s programme, about seven are from Asia, says Mr Alves, with the majority being North American lenders. Compared with US and Canadian players, Asian banks tend not to be as aggressive in terms of pricing and would request between 10 to 20 basis points over the price offered by competitors, he says. But working with those banks is worth the higher price, because of the additional liquidity they bring to the market, and also because of the relationship potential that a trade finance deal offers.

“[With regards to pricing], the Asian banks are not as aggressive as American banks, but it doesn’t mean that they’re out of the market. The demand is incredibly high and the supply is not enough,” says Mr Alves. “Latin American banks are [very keen] to start a direct relationship with Asia, so they would be willing to pay this additional difference. I did some transactions with two Chinese banks, initially on trade deals with Latin America, and now [the Latin American banks involved] are opening renminbi accounts with those Chinese banks.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter