Focus

Trade Finance | By Anita Hawser

Rebuilding Trust In Trade

Trade finance is stabilizing, but caution is the watchword in
an industry still reeling from the effects of the financial crisis.

T
hroughout the financial crisis, trade finance, that unglamorous function they realized that trade finance is the
within a bank that is often assigned to some operational backwater, really lifeblood of the economy.”
came into its own. Suddenly, political heavyweights like US treasury sec- At that summit, political leaders
retary Timothy Geithner were concerning themselves with the “plumbing” that pledged $250 billion to boost trade. Al-
supports the global trade system. “Last year at the G-20 summit in London when though the crisis started in the finan-
[French president] Nicolas Sarkozy and [US president] Barack Obama spoke about cial sector, it had a knock-on effect on
trade finance, they may not have known what it really was,” remarks Kamel Alzarka, global trade. Ashutosh Kumar, global
chairman of Falcon Group, which facilitates trade in emerging markets. “However, head of trade product management at

34 | Global Finance | April 2010

Standard Chartered, says that in 2009
trade volumes declined between 12%
and 15%. The decline in trade was at-
tributed to a number of factors, includ-
ing falling consumer demand, increased
protectionism and a lack of credit or
trade finance, with World Bank presi-
dent Robert Zoellick estimating trade
financing issues contributed to as much
as 15% of the decline in trade.
According to a March 2009 report,
Rethinking Trade Finance, published
by the International Chamber of
Commerce (ICC), approximately 50%
of companies surveyed said trade credit
lines available from banks had declined
between the end of 2007 and the end
of 2008. Four in 10 said they faced an
increase in fees for commercial letters
of credit (LCs), standbys and guaran-
tees. “During the crisis, many export-
orientated companies were unable to
raise—or had to pay considerably more
for—finance for their own working
capital needs even if they did have rela-
tionships with a large number of banks
or, in the case of SMEs, just one or two
providers,” says James Pumphrey, direc-
tor of Deutsche Bank’s structured trade
and export finance team.
The secondary market in trade risk
was also severely affected. “We would
go into the market and nobody was
there or they were on the other end
of the telephone saying, ‘Sorry we are
not doing anything,’” says Kumar. In
the secondary market, the banks’ shoes
were filled to some extent by joint pri-
vate and public sector initiatives such
as the IFC’s $3 billion Global Trade
Liquidity Program (see box). Export
credit agencies (ECAs) also played an
enlarged role during the crisis. Sweden’s
ECA, for example, received parliamen-
tary approval to increase its guarantee
limit. It can now issue guarantees for
up to SEK500 billion ($69 billion) and
says demand for guarantees is still at a
high level. It backed more than 1,400
transactions in 2009—a record in its
77-year history.
A number of the banks that disap-
peared from the secondary market at
the height of the crisis have since re-
turned, says Kumar, and he adds that
prices are softening again. But can cus-
tomers expect the same level of sup-
port from their trade finance banks
“Before the crisis, 90% of our
funding was geared towards
large corporate clients”
“And 10% was opportunistic. Post-crisis, 99.9% of our assets are going to
core clients. More boutique deals are not getting done and have probably
gone forever” —John Ahearn, Citi
that they received prior to the crisis?
A trade confidence index published
by HSBC last September sheds some
interesting light on customers’ expec-
tations of their trade finance banks.
HSBC surveyed more than 3,500 ex-
porters, importers and traders in 12
major global markets, and while al-
most 60% of respondents globally said
they did not expect their access to
trade finance to change, 31% expected
greater access. However, in the United
Kingdom, 45% of companies said they
would rely on their own capital com-
pared to 29% that would seek bank
support. “Strongly capitalized banks
like HSBC will continue to have the
appetite and the capability to support
customers’ trade finance needs as confi-
dence and activity returns,” stated Wil-
liam Nowicki, head of trade and supply
chain, HSBC North America.
“If they are a customer of the bank,
we will follow them no matter what
industry they are in,” says Jean-Paul
Riolacci, head of global trade solutions
at BNP Paribas. John Ahearn, global
head of trade, Citi Global Transaction
Services, says Citi’s priority is servicing
its customers, which typically are large
global companies. He adds that indus-
try sector is also important in terms of
who the bank extends credit to. “For
example, in certain industries, which
remain stressed, we are not lending
at levels going back four or five years
ago,” Ahearn says.
Although trade finance pricing has
softened somewhat, Kumar says it is
unlikely to go back to the way it was
before the crisis, as banks were not
pricing for risk back in 2007. Banks
may also now be viewing certain trade
finance deals slightly differently. “Be-
fore the crisis, 90% of our funding was
geared towards large corporate bank-
ing clients and 10% was opportunis-
tic,” says Ahearn. “Post-crisis, for Citi
and our major competitors, 99.9% of
our assets are going to core clients of
the bank. More boutique deals are not
getting done and have probably gone
forever.”
Banks are also concerned about the
impact Basel II is having on trade fi-
nance, as it does not assign favorable
capital ratings to what banks consider
to be short-term financing. Riolacci of
BNP Paribas says that, under Basel II,
trade finance is treated similarly to an
overdraft, which is not favorable to the
banks. Ahearn is equally concerned,
particularly if LCs are treated similarly
to credit default swaps. “Ultimately, if
banks have to put more capital against
their trade business, two things are go-
ing to happen,” he says. “Firstly, you
April 2010 | Global Finance | 35
Focus: Trade Finance

will see banks de-emphasize the prod-
uct if it is treated the same as the capital
markets business. Secondly, if you look
at trade finance as unsecured, unstruc-
tured one-year lending, which it isn’t,
capital allocation goes up. That means
pricing will go up. This is not benefi-
cial for the economic recovery.”
However, Kumar says banks can
minimize Basel’s impact if they are
prepared to change the way they con-
duct trade finance. Standard Chartered
has “a preference for structured trade
finance transactions,” he says, “as they
require less capital. We are embedding
Basel II within our trade finance busi-
ness, and by doing that we are mini-
mizing some of the impacts.”
Standard Chartered says it has also
managed to find investors for a series
of synthetic securitizations of trade fi-
nance loans. The first, back in Novem-
ber 2007, was valued at $3 billion and
entailed selling to investors the credit
risk of a diversified pool of 13,000
trade finance loans extended to more
than 1,500 borrowers in 23 countries.
It has since closed two other similar
deals. As Kumar explains: “The days
when the trade finance department of
a bank takes all the risk are gone. With
synthetic securitizations the credit de-
partment of a bank is one of the in-
vestors alongside pension funds, private
equity and hedge funds.”
The question now is whether there
is sufficient liquidity to support a sus-
tained recovery in trade. Pumphrey says
that banks are more prepared to lend
but they are extremely cautious about
how they use their liquidity, balance
Kumar: “We are embedding Basel Il
within our trade finance business”
sheet and credit risk limits. “Banks will
closely identify the strategic rationale
for lending and the opportunity for an-
cillary business including the provision
of trade finance,” he says. “If lending
can be specifically trade related, this is a
positive, so overall there should be suf-
ficient capacity in the bank market to
support the recovery in trade.”
While there may be sufficient mar-
ket liquidity to meet today’s demand,
Ahearn is concerned that a dramatic
spike in trade volumes could create
problems, particularly if commodity
prices start to increase again. “If you are
financing a shipment of oil at $80 a bar-
rel, which is the current price for crude
oil, the bank’s exposure is approximately
$43 million, and if oil goes back up to
$150 a barrel, the exposure for the bank
could be somewhere in the region of
$80 million, which would take capacity
out of the trade finance market pretty
quickly,” says Ahearn. The specter of
sovereign risk or default could also cre-
ate capacity issues, he adds.
So is it too early to talk of a recovery
in trade? Ahearn says the jury is still
out. “Confidence may be returning
among exporters in China, but what
you are also seeing is the central bank
there tightening credit,” he says. “Chi-
na has a long way to go in creating
domestic demand. And when I look at
consumer demand in the US and West-
ern Europe, with a few exceptions, I
don’t see consumers rushing back to
the markets. I’m not sure we’re out of
the woods just yet.” n

IFC Works To Boost Trade

T
he IFC’s three-year Global Trade Liquidity Program (GTLP)
commenced operations in July 2009 and is designed
to make trade finance more readily available to SMEs
in developing countries by disbursing funds to eligible banks in
these markets. In this way it helps boost the secondary market
in trade finance, which practically disappeared during the crisis.
Commercial banks provide 60% of the funding for the program,
and the IFC and its funding partners provide the other 40%. The
program is able to mobilize funding to support up to $50 billion
worth of trade, and so far it has disbursed $1 billion, with 34% of
that money going to banks in Africa to support small to mid-cap
companies that require trade finance. “The greatest utilization of
the funding is in Africa, Latin America (32%) and then Asia-Pacific,
which is 15%, and South Asia which is 10%,” says German
Vegarra, senior manager for the IFC’s Global Financial Markets,
which includes GTLP. Partner banks in the program include Citi,
Rabobank, Standard Chartered, Standard Bank, Commerzbank,
J.P. Morgan and Afreximbank, an export-import bank in Africa.
The IFC disburses funding to its GTLP partner banks. The
banks contribute their share based on the 60/40 split, and then,
based on their network of relationships with banks in emerging
markets, partner banks are responsible for ensuring the funds
are disbursed to where the money is most needed. Agreed limits
for funding have been set for different countries. The program
has accepted and reviewed up to 500 emerging market network
banks and is closely working with 100 of these.
The program is run as a commercial venture. “We have had zero
losses so far, and we are seeing commercial returns of between
2.5% and 3% in terms of yield depending on the region,” says
Hyung Ahn, senior investment officer, who co-leads the GTLP pro-
gram. The program continues to see strong demand for liquidity
from banks in Africa and East Asia. In Central and Eastern Europe,
Vegarra says there is greater demand for trade finance guaran-
tees, which is an area the GTLP will focus more on.

36 | Global Finance | April 2010

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