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Asia-PacificOctober 1 2012

After Europe's withdrawal: the reshaping of Asian trade finance

The effects of the European retreat from trade finance in Asia are now apparent as a number of players are stepping in and new trade patterns are taking shape. 
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After Europe's withdrawal: the reshaping of Asian trade finance

It could be described as a 'vacuum', a 'void', or simply a 'gap', and its consequences have been feared. The impact of Europe’s deleveraging on trade finance in Asia was feared because trade is so crucial to the region, and trade finance effectively its lifeblood.

And now the nature of Asia's trade finance landscape left behind by the retreat of some European banks is beginning to take shape. State agencies and Asian regional banks have stepped in to fill the gap, while the traditional players are steadily growing so they can benefit in the long run from the new trade patterns that are emerging in Asia.

Filling the gap

According to research by Morgan Stanley, it was the pull back by leading French banks, including BNP Paribas, Société Générale and Crédit Agricole that caused the greatest change to trade finance in Asia-Pacific. In the second half of 2011, Morgan Stanley estimates that the total deleveraging by eurozone banks was $89bn, two-thirds of which came from the French banks. By the start of this year, the market share of European banks in Asia had collapsed, and left a so-called void that had to be filled.

Kah Chye Tan, chair of the International Chamber of Commerce (ICC) Banking Commission, says that one of the effects of this centred on pricing, which shot up at the height of the pull out. “The market cannot withstand sudden changes or knee-jerk reactions,” he adds.

Mr Tan, who is also head of trade and working capital at Barclays, says that many people find it hard to believe that banks cut back on trade finance as it is considered to be a good-quality and low-risk asset. But because trade finance is short term – often 90 days – it is cut when there is a need to bring asset levels down rapidly. He describes what has been left as a “vacuum”.

Kuresh Sarjan, head of global trade and supply chain finance for Asia-Pacific at Bank of America-Merrill Lynch, says of the impact that the deleveraging has had on trade finance: “From China to [South] Korea to Asean [the Association of South-east Asian Nations], certain European banks have conspicuously curtailed activity as they redeploy capital in home markets and focus on meeting tighter capital commitments. This shift is not market-specific, though, nor is it overtly detrimental to the larger market.”

From China to [South] Korea to Asean [the Association of South-east Asian Nations], certain European banks have conspicuously curtailed activity as they redeploy capital in home markets and focus on meeting tighter capital commitments

Kuresh Sarjan

Steven Beck, head of trade finance at the Asian Development Bank (ADB), refers to the situation as an “enlarging gap”. He puts it down to a culmination of issues, such as less leverage and less capital being available for trade finance because of the state of the global economy. He also points to the impact that Basel III regulatory requirements are having on the willingness to support trade. “There is a natural proclivity for financial institutions to gravitate to higher risk if their costs are the same,” he says, adding that there is pressure on banks to improve their capital positions, which other observers cite as the main reason for the retrenchment of eurozone banks in Asia.

The ICC notes that at a global level, all multilateral development banks expanded significantly in 2011, and it was smaller, second-tier banks in emerging markets that relied heavily on their support. This trend has continued into 2012, and Mr Beck estimates that the level of activity at the ADB’s Trade Finance Program has increased by 40% in the first six months of the year, compared with the same period in 2011. “If the banks had the ability to do the deals on their own, they would do them. The ADB is not subsidising them – we charge market rates,” he says.

Changing landscape

The effect of the ADB’s Trade Finance Program is just one element that is reshaping the fragmented and diverse landscape of Asian trade finance. The reliance on state entities is reflected in data from Dealogic, which shows that the Export-Import Bank of China and the Export-Import Bank of the US are at the top of its tables recording lead arrangers of trade finance in Asia for the first half of this year.

In May, US president Barack Obama signed off on the reauthorisation of the Export-Import Bank of the US, allowing the agency to expand its capability to finance trade. Such entities are increasing their capacity in response to a range of events that are playing out in the global economy.

After Export-Import Bank of China and the Export-Import Bank of the US, the top mandated lead arrangers from Dealogic data from the first half of 2012 contained many strong Asia players: Mitsubishi UFJ Financial Group, HSBC, Mizuho, Bank of China, Sumitomo Mitsui Financial Group, ANZ and Chang Hwa Commercial Bank. This differs from Dealogic data from the same period the previous year, which had a more geographically varied mix of lead arrangers that included BBVA, Citi, Westpac, BNP Paribas, Deutsche Bank and Santander.

The size of the deals has also increased; in the first half of 2011, the largest arranger was BBVA with a deal value of $2.46bn, which pales in comparison to Export-Import Bank of China’s $3.31bn in the first half of 2012.

Who benefits?

A number of executives interviewed for this article commented that they do not supply data to Dealogic on their trade finance deals so the tables do not give the total picture.

Without a complete, comprehensive set of data available on trade finance, it is difficult to assess who the main beneficiaries of the changes will be in Asia. “People say that Australian and Japanese banks are stepping in, but I do not see it,” says Mr Beck. Dealogic data points to the dominance of Chinese and Japanese banks, but anecdotal evidence from those involved in trade finance in Asia paints a different picture. Mr Tan argues that US, UK and regional banks are stepping in as well as Chinese and Japanese institutions. “Everyone is filling the vacuum,” he says.

Research by Morgan Stanley shows that in the third quarter of 2011, Japanese and Australian lenders stepped in to fill the gap to some extent, but these efforts had stalled by the fourth quarter. When it comes to large-ticket trade finance, Morgan Stanley’s report notes that it is principally Japanese banks, HSBC and Standard Chartered that have filled the gap left by eurozone banks.

Mr Beck argues that such banks are very relationship-focused, and are therefore not opportunistic and just grabbing at any opportunities that come along. This view is confirmed by Simon Constantinides, HSBC’s regional head of global trade and receivables finance for Asia-Pacific. He explains that HSBC is selectively growing its business. “We are not looking for one-off deals,” he says.

Mr Constantinides's take on the current state of Asia’s trade finance, however, differs from the views offered by many of the high-profile players in the region. He argues that there is not a lack of finance, or a 'vacuum', that has been left by the retreat of other banks. Given the economic environment – with Europe in crisis, anaemic growth in the US and a slowdown in China – Mr Constantinides says there is not a shortage of trade finance, but rather an excess compared to the demand. He adds that the pricing remains aggressive and competitive in the region. “I do not think there has been a vacuum – I have not come across that” he says.

A difference of opinion

There are numerous views on what is happening in the trade finance sector and even the French banks cited in the Morgan Stanley report disagree with the portrayal of them as dramatically cutting back on Asian trade finance. In a statement, Crédit Agricole Corporate & Investment Banking (CA CIB) says, “While in the aftermath of the European sovereign debt crisis a deleveraging took place in 2011, activity has come back to a level that allows CA CIB to serve its clients properly.” Meanwhile, a BNP Paribas spokesperson says that its global trade solutions revenues are growing and that its trade finance exposure to corporates has increased since December 2010. At the group level, the bank’s CEO, Jean-Laurent Bonnafé, has signalled his intention to develop the bank’s presence in Asia-Pacific. Pascal Augé, head of global transaction banking at Société Générale, says that despite the general deleveraging on US dollar-denominated long-term lending in Asia, the bank is still very active in commodities and short to medium-term trade finance, especially in Asia, where there is still a strong push to grow.

Meanwhile the regional incumbents are making their move to gain market share. Ashutosh Kumar, Standard Chartered’s global head of corporate cash and trade, says of the bank’s approach to gaining market share: “We have a strategy of looking at our clients holistically rather than looking for short-term gains.” 

Standard Chartered covers a spectrum of clients from multinational corporations to small and medium-enterprises, and so has a range of competitors at all levels across different markets.

This diversity of the markets in Asia is something that Mark Evans, ANZ’s global head of trade and supply chain, is keen to emphasise. He says that at the end of last year there was a fear that there would not be enough appetite in the market to fill the gap left by the Europeans across the various markets. “The Europeans have withdrawn, but have not withdrawn on a wholesale level,” he says, adding that French banks were particularly active in the commodities sector and have withdrawn from relationships that are no longer deemed long-term and strategic.

Top Mandated Lead Arrangers for Asia-Pacific Trade Finance in H1 2012 and H1 2011

Dollar deposits

As an Australian bank, ANZ is well versed in commodities and has been one of the beneficiaries of the recent changes in the region. Mr Evans says that new partnerships have formed whereby the incumbent player may want to keep the client relationship, but needs US dollar liquidity from another bank to keep the relationship going.

This is where American banks have an advantage, with their access to a cheap dollar deposit base. Tod Burwell, senior vice-president of trade products at BAFT-IFSA, an international transaction banking trade body, says that US banks' ability to source dollars allows them to be more aggressive in their pricing.

And Morgan Stanley notes specifically that it is US banks JPMorgan, Citi and Wells Fargo that stand to benefit over time. Christian Edelmann, head of financial services for Asia-Pacific at consultancy Oliver Wyman, says that there are two types of institutions that stand to benefit: those with a US dollar funding base and also the Asian institutions that have a strong credit rating, such as Singapore bank DBS.

In its most recent results, DBS was buoyed by its trade finance activities. From June 2011 to June 2012, the bank’s gross loans expanded 22% to S$205bn ($116.83bn). This was driven by regional corporate borrowing, and trade loans accounted for half of the increase.

The ability to source US dollars has become crucial to success in Asian trade finance, a factor that has spurred Citi to boost its presence in the region. John Ahearn, global head of trade at Citi, says on the current environment: “Right now we have good opportunities to take market share.” In September, Citi announced that it was setting up a commodity trade finance unit in Asia.

Mr Ahearn explains that historically, Citi had stayed out of commodity finance because US banks were on Basel I, which he says put them at a disadvantage against other banks that were on Basel II, because of the additional capital needed. “Now that we are going on to Basel II, that disadvantage disappears,” he says.

Renminbi's rise

The majority of Asia’s trade is still denominated in US dollars, but attention is turning away from a reliance on a single currency. This is happening at the same time as intra-regional trade is on the rise.

Mr Beck points to the ADB announcement in July that it would support trade in renminbi as well as the Indian rupee. Previously, the ADB’s Trade Finance Program only covered transactions that were denominated in dollars, yen or euros.

Mr Kumar at Standard Chartered says that the renminbi is becoming increasingly popular in trade finance. Initially, he says, the Chinese currency was used in China, Hong Kong and Singapore, but now it is being used across the region, and he gives the example of a South Korean client taking its financing in renminbi.

Mr Kumar estimates that by 2015, 20% of China’s trade will be denominated in renminbi, and he questions whether the renminbi needs to compete with the dollar. “There is a big enough market for them both to co-exist. It is in the interest of the market to have multiple currencies and deep foreign exchange markets to support them in order to facilitate trade,” he says.

The increasing use of the renminbi falls in line with China’s shift to becoming a consumer, rather than a producer, for the developed world, and for Asia to increasingly trade with itself. Many banks, such as Standard Chartered, are positioning themselves to benefit from increasing intra-Asian trade flows as well as south-south trade between Asia and other emerging markets.

And the impact of the deleveraging on trade finance is also apparent in other emerging markets. Antonio Alves, regional head of short-term finance for the Americas at the International Finance Corporation, says that increased consumption – particularly in China – is driving a demand in commodities, of which Latin America is the world’s major producer. He notes there has been an increasing gap between these large demands and the deterioration in the supply of financing. “Asian banks are trying to seize this opportunity, and are becoming more active as trade-related lenders to commodity producer markets, such as Latin America.”

One observer says that Chinese banks are beginning to “flex their muscles” in financing Asian trade. Mr Edelmann at Oliver Wyman believes that Chinese banks are still in the early stages of this development. He notes that many Chinese banks have acquired small banks in Latin America and have used the acquisitions to access trade flows. So far, he says, they have not financed anything outside of their core markets, although Mr Alves notes that one Chinese bank has agreed to finance deals that do not necessarily involve Chinese trade flows.

A healthy picture?

Although there is much discussion about decreasing demand because of the current state of the global economy, as well as a slowdown in China, Mr Kumar is unworried. “Even a slowdown means good positive growth,” he says. This echoes the view that demand for trade finance in Asia is still high. Ravi Saxena, head of trade for Asia-Pacific at Citi, says: “In the past three to four years, the demand side has really ramped up across the full spectrum of trade products.”

And the current environment means that different structures are being developed. “In a crisis, buyers start to square credit inefficiencies and want to pay later. There is a large demand for various solutions in the supply chain space. We have stepped in to fill that,” says Mr Saxena. This falls in line with the industry trend of a greater focus on liquidity management and supply chain finance solutions.

Asian banks are trying to seize this opportunity, and are becoming more active as trade-related lenders to commodity producer markets, such as Latin America

Antonio Alves

Securitisation has also been an option as an alternative to traditional forms of trade finance. Mr Edelmann says that large banks, such as JPMorgan, have done this as a means of managing their risk-weighted assets, and he also notes there is a high demand for such products from institutional investors.

Mr Burwell explains that the participants at the trade body BAFT-IFSA have been looking at ways in which institutional investors can provide the US dollar liquidity that is needed for trade finance. “The challenge has been that the obligors for trade deals are rated, whereas the instruments themselves may not be,” he says.

When asked if there was a shift in the structures or types of trade finance that have become increasingly common, Mr Sarjan at Bank of America-Merrill Lynch says: “While Asia-Pacific has long proved a fertile breeding ground for innovative trade structures, market developments of the past several months have provided the industry with a new catalyst for evolution. Although there is no liquidity shortage in the broader market, it often hasn’t existed in the right places for trade. As a result of the market’s ongoing development, we’re seeing demand for higher-quality transactions backed by heightened agency involvement and guarantees and subsequently more capital market loans. Specifically, there has been some shift from money market funds into transactions that carry high-quality guarantees, which is positive for this space.”

As well as opportunities for new types of investors, banks that already have extensive networks and trade finance capabilities in the region are also well poised to benefit from the current environment. While there has been debate about the consequences of the retreat of eurozone banks, and fear of the hole that would be left, many of the region’s banks are looking further ahead and positioning themselves to benefit from Asia’s shift in consumption and trade patterns.

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