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Mark Evans, Global Head of Trade & Supply Chin, ANZ Bank
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Why trade finance is back in fashion
Mark Evans Global Head of Trade & Supply Chain, ANZ Bank
09-06-2010
April/May 2010 ATI Magazine
AFTER the sharpest decline in trade since World War 2, global trade is showing signs of rebound. In particular, intra-Asia trade has surged, with more recent export gains concentrated in the newly-industrialised economies of Indonesia, Taiwan, Korea and Singapore.
Most Asian countries are growing faster than the rest of the world – with India and China leading the way. And growth in Asia means growth in trade.
At ANZ, we are seeing increasing activity, especially in Asia, where the pace of transactions has picked up markedly.
Traditionally, these intra-Asia trade flows are associated with supply chains destined for final assembly in China, then re-export to the US or EU. And some of the current rebound is associated with manufacturers restocking after slashing inventories in the aftermath of the GFC.
But recent, inter-regional flows appear to be destined more for Chinese consumers – not to those in western markets like the US and EU, which remain weak.
So perhaps we are seeing some de-linking for Asia from the traditional markets of the west, and the GFC may have accelerated the shift in economic power to the Asia Pacific region.
India is another country that is of great interest to me as a trade banker, because India, like China, is also increasingly being driven by its own internal demand – generated by a growing middle-class.
The GFC impact on trade finance
A NUMBER of trends in trade finance have emerged from the GFC. Chief among these is that trade finance is back in fashion.
The global financial crisis was magnified by banks that lost sight of the important role of trade finance. Banks concentrated on lending using less structured products, such as overdrafts and loans. Rather than lending to customers based on their trade flows and the
related assets and cash flows, banks were extending credit against broader balance sheet items and property.
So when asset valuations began to fall, the banks had insufficient visibility to see what was really happening inside their customers’ businesses. They had moved away from the traditional commercial banking practice of customer lending based on underlying business activities, which consequently impacted control over their own loan portfolios.
ANZ’s trade business stood up well in the GFC — although pricing did go up (it is now returning to normal levels).
ANZ has always been clear about its wish to have a strong presence in offshore markets, and trade finance is a key component of our
regional offering, where we have always been willing to engage with our customers and commit to understanding their trade flows.
We have seen the GFC lead to some shift back to the comfort of letters of credit for our clients, and these will continue to remain important in many of our markets in the future.
However, the trend away to forms of open account financing is expected to continue as things return to normal. Over the next decade, I expect to see an increasing number of customers moving to open-account transactions.
As risk monitoring becomes more ingrained in banks following the global financial crisis, the financing of open account transactions, once considered a business banking product, will gradually shift over to the trade side.
The advantage of trade is that this allows more visibility over these transactions. This is really critical to getting credit flowing again.
While some banks may bemoan the trend away from LCs, at ANZ we view this as an opportunity to find new ways to support our customers. Helping customers integrate their operations across their working capital cycles, and using our people, technology and front-end system to improve their relationships with
their cross-border suppliers and customers,
is an evolution to which we are very much
committed.
The Challenges of Basle II
NEW capital adequacy requirements under Basle II significantly increase the ‘capital cost’ of trade financing; despite the lower levels of risk that are typically associated with this activity. The new parameters no longer reflect the fixed, short-term and self-liquidating nature of trade finance, overstating the risk, and therefore regulatory capital required to support trade finance.
Capital is now applied similarly to other lending products, placing trade finance at a disadvantage in the internal competition for capital, where trade has more onerous requirements around documentation.
There is no doubt that Basle II has had a negative impact on trade finance, and this is a challenge for trade bankers worldwide.
My role as Head of Trade & Supply Chain is to work with stake-holders internally and regulators externally to help them better understand the trade business, and to build a case that Trade should be treated differently. |
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