Trade finance is emerging as a key part of the Latin American banking business model and is bound to be a hot topic on the agenda at this year's Felaban annual meeting being held in Colombia in November. Ahead of this, The Banker speaks to experts about the challenges and opportunities that this growing business line is creating in the Latin American market.


Jose Clemenceau, head of products, trade export commodity finance, Santander Brasil

Renato Faria, trade head, Latin America, Citi

Gerd Pircher, regional head of global trade and receivables finance, Latin America, HSBC

Kika Ricciardi, head of global transaction banking for Latin America, and head of trade finance and cash management corporates for Latin America, Deutsche Bank

Ricardo Velázquez, head of international banking, Banorte

With international trade flows at record levels and new trade routes being established, trade finance looks set to retain its newly acquired strategic status within banks the world over. This is true for both local lenders, which have a granular knowledge and prime relationship with corporate clients, and for international financiers, which can accompany businesses across multiple markets.

As Latin America's banks prepare for Felaban’s annual meeting in Medellín, Colombia, in November, The Banker asked a panel of experts to discuss the current trends in the industry and to predict where future opportunities and challenges lie.

Q: Where do the biggest opportunities lie in Latin American trade finance?

“Latin America is a very heterogeneous region, so opportunities differ but are plentiful,” says Gerd Pircher, HSBC’s regional head of global trade and receivables finance for Latin America. He singles out Mexico, where foreign direct investment is flowing into the country on the back of recent energy reforms. The country may also benefit, he says, from the re-shoring of US manufacturing, as Mexico is still very cost-efficient in this area. Such a trend would “shorten logistics chains and reduce the risk of [rising manufacturing] costs”, he says.

Ricardo Velázquez, head of international banking at Banorte, is based in Mexico and has witnessed rising international foreign direct investment first hand. As well as this, he is also optimistic about the opportunities presented by intra-regional trade after Mexico signed agreements with Colombia, Peru and Chile as part of the Pacific Alliance. The country has also reached other international trade agreements.

“[The Pacific Alliance] accounts for more than 50% of total trade [within Latin America], and will only increase its relevance and weight. The Trans-Pacific Partnership will give Latin American countries that are part of the partnership [Chile, Mexico and Peru] greater access to countries in the Pacific Rim," says Mr Velázquez.

Jose Clemenceau, head of products, trade export commodity finance at Santander Brasil, says that there is room to grow in the Brazilian market as smaller companies are beginning to look at international exports.

Mr Pircher notes that Brazil seems to be relatively unaffected by declining commodities prices, something that Renato Faria, head of trade for Latin America at Citi, agrees with, saying that commodities-linked products offer interesting growth opportunities. Mr Faria also names infrastructure as a growth area in Brazil. “Given the lack of infrastructure-related investments in the past decades, both public and private sector companies are developing turn-key projects, which are generating an increased demand for sources of financing," he says.

A few countries stand out, according to Kika Ricciardi, Latin America head in Deutsche Bank’s global transaction banking business. “Countries such as Colombia and Panama have each committed to a number of large infrastructure projects that will require additional financing in the near term. Both countries benefit from an investment-grade credit rating, which makes them particularly attractive to lenders,” she says.

Furthermore, growing corporate activity within Latin America, and the need for companies to optimise working capital ratios, offer new business avenues to trade finance houses. “These two factors [allow] banks to extend financing to less credit-worthy companies down the supply chain, thus maximising returns at healthy risk levels,” says Mr Faria.

Supply chain finance is indeed a growing area, according to Ms Ricciardi, who says: “Post-crisis, working capital solutions have become a very favourable way for corporates to manage their liquidity. We have recently rolled out solutions, such as an automatic confirmed payables tool, which have helped Deutsche Bank’s clients in the region improve the liquidity in their supplier finance programmes.”

She goes on to detail other products that are attracting strong interest and that give clients greater flexibility. “While there is still consistent demand for traditional trade instruments, such as commercial letters of credit and collections, there is growing demand from clients for sophisticated solutions, such as open account solutions, silent payment guarantees and account receivable programmes,” she says.


Q: What are the biggest challenges for trade finance in Latin America?

Aside from growing competition and adverse market conditions, regulation seems to be the largest concern for trade financiers – whether they are part of a global firm or a local bank.

“Increased competition from local banks and abundant liquidity [reduces] spreads, which ultimately creates a challenge [if we want to] maintain proper returns without jeopardising market share,” says Citi's Mr Faria. “Also, the global regulatory environment and the different impact that new regulations [such as Basel III and the Dodd-Frank Act] have over global banks compared with local banks create additional challenges for international players.”

Local banks are concerned about regulation, too. Banorte’s Mr Velázquez is concerned about the potential negative impact that Basel III will have on the affordability of trade finance. But, he believes that concerted efforts by lenders and international organisations are useful in presenting the case for trade finance to regulators. "Banks and trade organisations, such as the World Trade Organisation and the International Chamber of Commerce, should keep partnering and gathering meaningful trade finance data. This information will facilitate a better understanding and regulatory treatment of the trade finance business among policy-makers, regulators and political leaders around the world," he says.

Other external factors are also coming into play, such as weakening commodity prices, says HSBC's Mr Pircher. He also cites country-specific issues and widespread structural impediments as creating challenges for banks. “Drought and election-related uncertainty in Brazil in much of 2014, the pain of tax reforms in Mexico, and external restrictions aggravated by continued uncertainty regarding disputes with bondholders in Argentina. [There are also] serious structural hurdles – from low investment in fixed assets [such as infrastructure] to the unfriendly business environment and poor human capital – which have been driving the region to a situation of reduced competitiveness. In economic terms, Latin America is currently [taking] two steps forward and one step back, and trade is no exception to this theme,” he says.

Ms Ricciardi cites political elections as a crucial source of disruption. “Elections in both Brazil [at the end of October] and Argentina, in October 2015, regardless of the political outcome, will determine shifts in the macroeconomic, fiscal and monetary policies in those countries. Some of the changes have already been priced into the market, while others are still to be determined," she says.

Q: Can both local and international lenders benefit by working together to serve smaller businesses? What is hindering product growth in this segment?

Lenders agree on the benefits of co-operation and the need for development on this front. “Small and medium-sized enterprises [SMEs] represent approximately 80% of the total number of companies involved in trade in the region, but inversely represent less than 15% of the total amount and volume of trade financing,” says Mr Velázquez.

Because of their limited credit history and technical expertise when it comes to financing, work for smaller companies “requires a deeper knowledge of the clients and main shareholders, which can only be achieved by local financial institutions”, says Mr Velázquez. “On the other side, in many cases local banks are less equipped and lack the global capabilities required to offer trade financing services compared with their international counterparts.” 

HSBC's Mr Pircher acknowledges the limitations of some global players, which often lack granular knowledge of foreign markets. “There will always be the space and necessity for local and international lenders to support smaller businesses sitting alongside each other,” he says. “There is nothing hindering product growth in this segment, other than the fact that there are very few international lenders that can genuinely link up smaller Latin American businesses with buyers and suppliers, which may be equally small, in other parts of the world. The further afield those trading partners are, in particular in emerging countries in Asia, the Middle East or in Africa, [the fewer] banks can genuinely support them, not just with trade finance but with the support services and the ‘handholding’ that that type of client really requires.”

Deutsche Bank’s Ms Ricciardi adds: “Local and international lenders can work very well together. There are limitations [for international banks] when it comes to lending to small businesses. Local banks play a vital role in this respect and with lending occurring primarily in major currencies, international banks can help and support [local banks] indirectly. Local banks do not always have ample liquidity in these major currencies and therefore rely on international banks to supply them via trade funding arrangements.”

Q: As international trade flows grow and transactions become more complex, how do you manage spiralling compliance risk?

The industry is painfully aware of the risks of falling short of wide-reaching, heavy, new compliance requirements – from Basel III’s capital rules to the Dodd-Frank Act, to the Foreign Account Tax Compliance Act and anti-money laundering and privacy laws. Banks have invested in procedures and systems to deal with the new regulatory web surrounding trade finance deals, according to both Mr Faria and Mr Clemenceau.

But, the new regulatory environment is far from being untangled.

“There is no global standard for [anti-money laundering], terrorist financing and sanction regulations and they vary considerably, and sometimes may even be [conflicting] in different jurisdictions,” says Mr Velázquez. “Because of this, the banking industry is struggling with the complexity and pace of change in the local and global compliance environment relating to trade finance transactions. The more complex and interconnected the compliance system, the greater the risk of vulnerability and breakdown.” 

Mr Pircher is optimistic about the industry’s ability to respond to such regulatory challenges, but he also warns of the dangers of misregulation. “The good news is that while global supply chains have become more complicated, so too has the technology and expertise we have in place to manage these risks,” he says. “On compliance risk, the global financial crisis rightly led to a reinforced regulatory framework, making the financial system safer.

"However, it is important to ensure that trade finance continues to be recognised as low risk and self-liquidating, which is why we welcomed Basel’s decision to lower the capital requirements for trade finance. Without a reliable international trade finance network, exporters and importers would face greater risk and incur higher costs. In some instances, without trade finance a deal could not take place at all – particularly if one of the parties is considered to be higher risk. These effects would be felt disproportionately in emerging regions, such as Latin America, and by SMEs, for whom trade finance offers an indispensable form of collateral.” 

Ms Ricciardi says that the best solution is simply to confine business activities to markets and companies that banks are truly comfortable with – a reflection of the more cautious post-financial crisis attitude that is being applied across all banking products.

“A number of risk dimensions have been added to the [market]: along with sovereign and credit risks, environmental, reputational and compliance risks are also ever present in financing complex projects and trade flows in emerging markets,” she says. “Banks such as Deutsche Bank continue to spend more time and resources in the analysis and mitigation of these risks. We are very focused on doing business only in those markets and sectors that we [fully] understand.”

Q: Is securitisation helping to develop a secondary market for trade finance assets in the region? What needs to be done to deepen the market further?

“Securitisation is likely to become an ‘add-on’ to the trade finance business in Latin America, as happened in the US and to some extent in Europe,” says Mr Faria.

“Banks will increasingly face balance sheet constraints when it comes to asset growth, and securitisation may become an interesting way to address these constraints. For this to become a reality, a stronger, more uniform legal and regulatory framework that allows international investors to access our markets in the region must be in place. If we look at where we were on this subject some 20 years ago, we can see that a lot of progress has been made. But, we still have a way to go to turn securitisation into a real tool for developing a secondary market for trade assets in Latin America,” he adds.

Mr Pircher at HSBC says: “The implementation of Basel III and deployment of risk-weighted assets means banks are looking with greater interest at securitisation, as it can be a good tool to keep lines open for corporate clients. While there are discussions taking place in the market, I cannot see these translating into a large number of deals in the immediate future. For banks with a global footprint that are helping importers and exporters at both legs of the trade, there is appetite to hold trade finance risk. For banks that do not have trade as a core business, securitisation of trade assets can be a good alternative. As long as you are in line with local regulation, securitisation offers another option to help customers grow their business.”  

Local banks seem to be more conservative, however. Santander Brasil’s Mr Clemenceau says: “This is a new market and we haven't seen local banks putting lots of effort into it. But Santander Spain has taken the first step, and last year it launched a $1bn three-year rated asset-backed securities product composed of short-term trade finance assets originated by Santander and another competitor.

"A percentage of Santander's assets in this programme are composed of Brazilian loans. Our multi-banking asset participation programme is aimed at enhancing the ability of trade banks to support global trade flows by addressing challenges facing the banking industry, including capital management, liquidity, increased credit constraints and capital requirements imposed by Basel II and III.”

More needs to be done to encourage financial institutions other than banks to trade finance products, which would encourage the development of a secondary market. Mr Velázquez at Banorte says: “The distribution of trade finance risk has been present in the region for many years through the trade credit insurance market. However, in recent years, a number of large global banks have actively explored ways to distribute trade finance risk to other non-bank investors.

"So far, the involvement of alternative investors has been mainly limited to boutique non-bank financial institutions [NBFIs] focused on customers that face constraints in accessing bank-intermediated trade finance, such as SMEs in emerging markets. The attraction of capacity and capital to support additional trade financing still has a long way to go, which requires standardisation and transparency of trade finance assets, education about the nature of trade risks and dialogue and interaction with potential NBFI investors in order to be able to compare trade loans with other asset classes.”


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