ANNUAL SURVEY: TRADE FINANCE BECOMES AN ASSET CLASS
By Gordon Platt
Global Finance presents its annual awards for the Best Trade Finance Institutions globally, regionally, and by country. The outlook for the trade finance business in 2014 is rosy, based on economists’ expectations for a pickup in global economic growth, led by the developed countries.
There are a number of potential pitfalls, however, that need to be avoided. Perhaps the biggest concern is that regulators could raise the cost and lower the availability of trade finance as an unintended consequence of their efforts to make the banking system stronger.
Certain aspects of the Basel III framework, including a proposed leverage ratio, could result in reduced global trade flows at a time when they are essential to support economic recovery, according to BAFT-IFSA, an international financial services trade association. A binding leverage ratio would encourage institutions to hold assets that are more rather than less risky, the association says.
This is because riskier assets would produce a higher relative return on capital than safer assets. As trade finance instruments are underpinned by the movement of goods and services, they do not lead to the kind of leveraging that may endanger real economic activity, according to BAFT-IFSA.
Global regulators appear to be listening. In January the Basel Committee on Banking Supervision made concessions to banks by watering down debt-limit rules that could have penalized low-risk financial activities, such as trade financing. The committee will allow banks to use netting to calculate the leverage ratio. The regulatory disincentives for trade finance were relaxed, but not eliminated.
CENTRAL BANKS’ ENDORSEMENT
After a meeting in Basel, Switzerland, on January 12, the Group of Central Bank Governors and Heads of Supervision, which oversees the committee, endorsed the leverage ratio framework. Mario Draghi, president of the European Central Bank, said: “The finalization of an internationally consistent measure of bank leverage is a significant step toward the full implementation” of the new regulatory regime developed since the global financial crisis. Draghi described the leverage ratio as “an important backstop to the risk-based capital regime.”
The Basel Committee says that any final adjustments to the definition and calibration of the standardized leverage ratio, which is currently set at 3%, will be made by 2017. The minimum capital requirements would go into effect on January 1, 2018. Banks will be required to publicly disclose their Basel III leverage ratio on a consolidated basis from January 1, 2015.
REVISING THE RULES
The Basel Committee revised the rules used to measure some off-balance-sheet activities in order to benefit trade finance transactions. The new rules do not require banks to count 100% of their off-balance-sheet assets, including guarantees, letters of credit and derivatives exposures, when calculating the leverage ratio.
They will be able to take risk into account. When converting an off-balance-sheet exposure to an on-balance-sheet equivalent, the leverage ratio will use the Basel framework’s standardized approach for credit risk under the risk-based requirements, subject to a floor of 10%.
BAFT-IFSA says it supports the committee’s efforts to impose a leverage ratio as a means to reinforce and complement the risk-based capital requirements. However, it says the risk-based requirements should be the binding requirements for most institutions, in order to correlate their capital levels with the actual risks they take.
The leverage ratio should remain the supplemental requirement, according to BAFT-IFSA. “Reversing this intended relationship would have a significant impact on the provision of important commercial financing services, including trade, export and development finance,” it said in its comments to the Basel Committee last September. It noted that in other areas of regulatory supervision recommended by the committee, trade finance has received recognition as an important real-economy financing product.
The industry association is trying to standardize the securitization of trade finance assets, helping to create a new asset class for institutional investors. In December 2013, Citi and Santander sold $1 billion of trade finance assets. This was the first such securitization involving more than one bank in different countries. It followed a commodity trade finance securitization by BNP Paribas in August 2013.
Meanwhile, the demand for trade finance continues to outrun the supply, particularly in emerging markets. An excellent trade finance bank is an essential partner for corporations as they expand their global reach.
Global Finance editors, with input from industry analysts, corporate executives and technology experts, selected the best trade finance banks in 83 countries or regions. A poll of Global Finance ’s corporate readership was conducted in order to increase the accuracy and reliability of the results.
Criteria for choosing the winners included trade-related transaction volume, scope of global coverage, customer service, competitive pricing, risk management and innovative products, services and technology. The winners are those banks that best serve the specialized needs of corporations as they engage in cross-border trade.
|Best Trade Finance Bank||Citi|
|Best Trade Finance Program||EBRD's Trade Facilitation Program|
Best Trade Finance Multilateral Institution
or Export Credit Agency
|Export-Import Bank of the US|
|Western Europe||Royal Bank of Scotland|
|Asia Pacific||Standard Chartered Bank|
|Central & Eastern Europe||UniCredit|
|Middle East||Arab Bank|
|Algeria||Arab Banking Corporation Algeria|
|Austria||UniCredit Bank Austria|
|Bahrain||Arab Banking Corporation|
|Canada||Royal Bank of Canada|
|Chile||Banco Santander Chile|
|China||Bank of China|
|Colombia||Banco de Bogota|
|Cyprus||Bank of Cyprus|
|Czech Republic||UniCredit Bank|
|Egypt||Commercial International Bank|
|Georgia||Bank of Georgia|
|Greece||National Bank of Greece|
|Hong Kong||Standard Chartered Bank|
|India||State Bank of India|
|Indonesia||Bank Central Asia|
|Japan||Bank of Tokyo-Mitsubishi UFJ|
|Kenya||Kenya Commercial Bank|
|Kuwait||National Bank of Kuwait|
|Malta||Bank of Valletta|
|Mexico||Banco Santander Mexico|
|Nigeria||First Bank of Nigeria|
|Palestine||Bank of Palestine|
|Portugal||Banco Espirito Santo|
|Qatar||Qatar National Bank|
|Romania||ING Bank Romania|
|South Africa||Standard Bank|
|South Korea||Korea Exchange Bank|
|UAE||Abu Dhabi Commercial Bank|
|UK||Royal Bank of Scotland|
BEST TRADE FINANCE BANK: Citi
Citi’s global footprint, innovation and on-the-ground relationships with corporate clients make it the trade finance provider of choice for 2014. As the international trade business changes, and clients’ needs become more complex and challenging, Citi has stepped up to the plate with a full array of flexible and efficient financial tools to meet the short- and long-term capital needs of its customers. Citi’s operational scale and global network are augmented by the bank’s long-standing relationships with official export credit agencies, development finance institutions, and multilateral agencies. New global capital rules for banks are making it difficult for many of them to continue offering trade finance. Citi is taking the lead in using aggregation and securitization to work with its correspondent banks and investors to find a solution. Citi provides its customers the ability to manage trade payables and receivables, and to conduct other trade-related transactions, through its CitiDirect online banking system. Its supply chain finance offering supports payment flows to more than 65,000 suppliers. Supplier Finance Mobile is a new capability giving suppliers real-time, on-the-go access to information about their transactions via browser-based mobile connections. With its Integrated Freight Processing portal, Citi has simplified the complexities of managing transportation invoices and payments. The service streamlines and automates the entire audit, approval and payment process by converting all invoices into electronic data and routes them through an electronic workflow that matches invoices against bills of lading or purchase orders. This helps to resolve disputes and execute payments on a timely basis. The system offers online tracking plus receivables financing. More than 10,000 transportation service providers conduct business on the platform.
BEST TRADE FINANCE PROGRAM: European Bank for Reconstruction and Development (EBRD)
EBRD’s Trade Facilitation Programme, which has been operating since 1999, provides guarantees to international confirming banks and short-term loans to factoring companies and other financial institutions. The program supports international trade within Central and Eastern Europe, the Commonwealth of Independent States, and the southern and eastern Mediterranean regions. The TFP works with more than 100 issuing banks in 22 countries, and 800 confirming banks worldwide. TFP guarantees cover the political and commercial payment risk for up to 100% of face value of transactions by issuing banks in the countries where the EBRD operates. The guarantees are available for letters of credit, bid and performance bonds, and trade-related promissory notes. Last March the EBRD signed a $75 million trade finance line with Morocco’s BMCE Bank to help the country’s small and medium-size enterprises engage more widely in international trade. It will support export and import facilities for transactions with tenors of up to three years for guarantees and 12 months for cash advances. This will enable BMCE to extend the maturities of its own trade finance products.
BEST TRADE FINANCE MULTILATERAL INSTITUTION OR EXPORT CREDIT AGENCY:
Export-Import Bank of the US
In fiscal year 2013 the Export-Import Bank of the US (Ex-Im Bank) supported $37 billion in exports, including a record 3,413 transactions for small businesses. These exports created or sustained approximately 205,000 US jobs. Ex-Im Bank, a federal agency, offers export credit insurance to small-business exporters, which enables them to sell on open-account terms and extend credit to foreign buyers. It can also help them obtain working capital to fulfill export orders. As manufacturing makes a comeback in the US, the Ex-Im Bank is helping companies to sell “Made in USA” products to growing middle-class markets around the world. US companies are helping meet the need for infrastructure in emerging markets, such as electricity, clean water and transportation. Among the markets with the largest percentage increases in purchases of US goods last year were Panama, Russia, the United Arab Emirates, Hong Kong, Peru, Chile and Colombia, according to the US Commerce Department. In a decision that will support 3,400 US jobs, Ex-Im Bank in December authorized a $694 million loan to Roy Hill Holdings of Australia, contingent on the purchase of US mining and rail equipment from Caterpillar, GE and Atlas Copco. That same month it also approved a $641 million loan to Star Refineri to finance the export of US refinery equipment to Turkey, supporting another 3,000 US jobs.
With its in-country trade capabilities in 81 countries, Citi handles more than two million international trade transactions a year. The bank has partnerships with 65 export credit agencies. Its supply-chain finance offering supports more than $40 billion of annual payment flows. In the Americas, Citi has trade experts stationed throughout the US, Canada and Latin America. A regional processing center in Tampa, Florida, supports trade transactions for Citi’s branches in 23 countries in Latin America. The bank has significant market shares for trade products in Brazil, Argentina, Peru, Colombia and Mexico. It offers supplier-finance programs in Latin America to more than 8,500 suppliers in 16 countries. The US Ex-Im Bank provides a partial risk guarantee to cover receivables purchased under a Citi supplier-finance program. In Latin America last year, Citi issued the first letter of credit denominated in Chinese renminbi. It has made payments in renminbi for its clients in Latin America since 2011. Citi also provides a wide range of trade services to financial institutions, including white-labeled products. Citi founded a multibank global trade program in 2010 that gives participating banks the ability to originate and fund trade assets through the structured issuance of asset-backed securities and commercial paper. The program is helping banks to continue to offer trade finance in a new regulatory environment, where the implementation of the Basel III capital rules is making it more difficult to compete.
WESTERN EUROPE: Royal Bank of Scotland
Royal Bank of Scotland’s trade finance focus starts with the UK and extends to the 38 countries that are most important to its clients. In its home market, RBS partnered with asset finance company Lombard to introduce an innovative capital-import finance product that enables companies to import plant and equipment to expand their business. RBS has executed large guarantees in Europe for multinational companies with complex supply chains. It is the leading UK bank to provide deals backed by the country’s Export Finance department. A new China desk in London helps Chinese companies expand internationally and helps European companies do business with China. In addition to its offshore renminbi operations in Hong Kong and Singapore, The Royal Bank of Scotland owns a locally incorporated leasing company, RBS China, on the mainland, as well as stakes in joint-venture companies. RBS employs more than 1,500 trade staff globally. It offers sector-specific trade services in the retail and consumer businesses, petrochemicals, telecoms, manufacturing, automotive, and metals and mining industries. More than 1,200 suppliers worldwide use the bank’s MaxTrad supply-chain finance portal to sell their receivables to RBS. Amid growing demand from corporates for alternative sources of liquidity in a tightening credit environment, The Royal Bank Of Scotland offers innovative supply-chain finance solutions. The bank’s e-invoicing service facilitates the secure exchange of documents online between buyers and suppliers. By integrating supply chain finance with e-invoicing, RBS has reduced invoice approval times and enabled straight-through processing for its clients.
NORDIC REGION: Nordea
Nordea has a leading market share in the Nordic region of more than 38%, on average, for letters of credit and trade collections, not including guarantees. It handles more than 6,000 Nordic trade transactions a month across documentary credits, collections and guarantees. It has the largest distribution network in the Nordic and Baltic regions, with approximately 1,000 locations. Nordea’s trade finance business uses a global operating model, with the same system for processing transactions and serving customers worldwide. It focuses on delivering consistently high-quality services. In addition to the Nordic and Baltic regions, Nordea has trade finance units in Central and Eastern Europe, North America and Asia. Nordea is continuously developing its trade finance processes in close cooperation with its customers. For example, it created a customized procedure for the electronic presentation of documents under export documentary credits. The bank also supports the use of Swift corporate-to-bank messaging for trade finance. Its e-invoicing solution demonstrates that Swift can bridge bank and nonbank service providers across borders.
CENTRAL & EASTERN EUROPE: UniCredit
UniCredit is a market leader in Central and Eastern Europe, where it is one of the biggest international banking groups. The Italian bank’s network of more than 4,000 correspondent banks gives it a global reach that extends well beyond the 50 countries in which it has a direct presence. UniCredit’s global transaction banking unit employs more than 2,000 people. Its clearing gateway throughout Europe offers a single point of entry for letters of credit and guarantees related to beneficiaries based in all the countries where it operates. The Central and Eastern European region is still strongly dependent on Western Europe for trade and investments, particularly from Germany and Italy. The bank’s @GlobalTrade offering enables corporate clients to handle guarantees and letters of credit with all their banking partners through a single platform tailored for large corporations with significant volumes. Suppliers are able to sell invoices through the bank’s trade purchase program at a discount. This enables buyers to extend their average days payable outstanding (DPO), reducing the need for working capital. UniCredit has also been a leader in the adoption of the bank payment obligation (BPO), which has the characteristics of an electronic letter of credit payment instrument and fits well with supply chain financing.
ASIA-PACIFIC: Standard Chartered
Standard Chartered has an extensive Asian presence, covering 20 countries with more than 1,000 branches. Growing trade flows and the dominance of open-account transactions are placing a greater emphasis on supply chain finance, an area in which Standard Chartered excels. Standard Chartered has been a leader in the rapidly expanding renminbi business. It was the first foreign bank to obtain a settlement and agency bank license in China. It facilitated the first two-way (payments and collections) renminbi cross-border trade settlement, as well as the first domestic trade in Hong Kong settled in renminbi. It offered the first renminbi bid bond in Malaysia, which was the first renminbi guarantee in the region. Standard Chartered has 99 branches across India, where its trade volumes have continued to grow despite slowing GDP growth and weakening trade flows. It is a leading provider of strategic and comprehensive working-capital solutions. The bank takes a holistic view of the business model and working-capital cycle of its clients. Its vendor prepay program integrates clients’ accounts payable systems to help their recommended suppliers gain access to financing. With Standard Chartered’s structured warehouse finance product, clients can unlock liquidity trapped in their inventory, which is used as collateral to increase funding.
MIDDLE EAST: Arab Bank
With a network of more than 600 branches and a presence in 30 countries, Arab Bank is able to capture trade flows worldwide. Its local expertise throughout the Middle East and North Africa benefits its clients by helping them to meet their specific trade finance needs. Arab Bank’s relationship managers and product specialists work closely with clients and provide customized services, as well as a wide range of standard offerings. The bank prices its services competitively, taking into account the country risk of each country where it operates, as well as its clients’ overall transaction business, including cash management. Arab Bank’s online cash-management solution has been implemented across the region and includes a trade finance portal. Arab Bank has a centralized trade finance business line at its head office in Amman, Jordan, ensuring that its overall strategy and quality is maintained across the group. Trade is an integral part of the bank’s business development strategy globally. Arab Bank offers a full range of trade finance products to support flows out of and into the region, as well as increasingly among countries within the Middle East.
AFRICA: Standard Bank
Standard Bank, also known as Stanbic in certain markets, is Africa’s biggest bank by assets and earnings. It offers a comprehensive array of trade finance products, including a range of offerings to meet the working capital requirements of its customers. The South African bank has a presence in 18 nations in Africa, where it has 1,250 branches, positioning it strategically to handle its global correspondents’ trade flows. It also operates in 12 countries outside of Africa. The bank’s centralized client service for trade is experienced in document checking and the application of Uniform Customs and Practice (UCP) rules. Industrial and Commercial Bank of China is Standard Bank’s largest shareholder. The unique arrangement helps Standard Bank to facilitate growing trade flows between China and Africa and other emerging markets. Standard Bank connects select emerging markets to Africa and to each other, drawing on its expertise in natural resources globally. Its corporate and investment bank also specializes in mining and metals; oil, gas and renewable energy; telecom and media; power and infrastructure; agribusiness; and financial institutions. Standard Bank in London is a member of the London Stock Exchange, the London Bullion Market Association, the London Metal Exchange, the London Platinum and Palladium Market and the New York Mercantile Exchange (Comex division).