Regional banks can take advantage of the $1.6 trillion funding gap that exists in trade finance but only if they move quickly.
When multinational companies consider banking services for their business, they tend to prefer large global banks with international branch networks. This is especially true in trade finance, which is dominated by a handful of global multinational mega-banks.
Yet there are tremendous opportunities for banks that have enhanced regional power—particularly in Asia, Latin America, Middle East, and Africa—to play a more prominent role international trade finance in their respective markets. According to the International Chamber of Commerce, there is a $1.6 trillion funding gap in trade finance markets. Regional banks can play a more prominent role this space—potentially partnering with larger banks and embedding themselves with multinational clients—before they find themselves crowded out by the bigger, global players.
Now is the time for regional powerhouse banks to step up their game and grab greater market share, especially now that new technologies are reducing the need for physical infrastructure to process transactions.
Competitive Advantages of Regional Banks
From a trade finance perspective, regional banks enjoy certain advantages over the global behemoths, including more in-depth understanding of local markets and greater acceptability to important local clients, including major multinationals, state-owned enterprises and governments. Most clients feel comfort that a local brand is there to stay, and a local bank will provide them with customized care and support—unlike many multinational giants that focus on the top end of the market (i.e. top-50 corporate clients) and make decisions at the home office, without much awareness of local realities.
Furthermore, since regional banks are headquartered locally, they tend to have higher legal lending limits and credit appetite than the local subsidiary of the average multinational bank. They may also have access to cheaper sources of liquidity from local government or state-owned enterprises.
Meanwhile, ‘too-big-to-fail’ banks face problems that their regional brethren do not, such as additional capital and regulatory requirements. Their operating costs can be higher, since they maintain a wider international branch infrastructure than regional banks. In addition, several of the biggest banks face increased internal liquidity premiums being charged by treasury (especially in USD), which eat into trade finance asset margins.
Avenues of opportunity for regional banks in the international trade finance space include:
1. Receivables: Global manufacturing is geared toward economies of scale, whereby global corporate entities move to low-cost manufacturing bases (usually in emerging markets) and expand sales to companies local in the country to grow revenues.
These local corporations (especially mid-tier ones) want longer credit terms with competitive pricing. Hence multinational clients are looking for receivables financing and/or distributor finance solutions from their global banks to boost their in-country sales while at the same time managing their risk and realizing the funds upfront.
However, most global banks have limited credit appetite to serve mid-tier local corporates, opening a possibility for regional banks to step in at this juncture (as they have higher credit appetite for in-country clients) and help finance these trade flows. There is an opportunity for regional-international bank collaboration instead of competition that can lead to win-win scenarios for both parties.
2. Vendor on-boarding: Regional banks have better access to local mid-tier corporates (i.e. vendors in supply chain finance programs) and are very well positioned to change the rules of the game by partnering with supply chain platform providers to on-board these suppliers/vendors more efficiently.
This will be win-win for both parties. The global banks typically don’t have a commercial banking division targeting these mid-tier local companies. The regional banks can expand their commercial banking divisions and entrench themselves with local corporates, managing their operating accounts and getting cross-sell opportunities like FX, idle balance and other financing transactions.
3. Optimizing returns on surplus liquidity: Most regional banks have smaller teams handling a wider set of products than international banks, which tend to create divisions of deep specialization. Regional players can thus be more agile, since they do not have as many bureaucratic layers to contend with internally.
Most of these regional banks have surplus liquidity that is now placed in central banks and financial counterparts earning low yield (sub-Libor), which could be redeployed into investment-grade trade finance assets pertaining to banks and corporate obligors earning higher margins (Libor plus credit spread). This could improve their all-in yield by 20%-30%.
Some of these opportunities include financing letters of credit issued by investment-grade banks pertaining to large commodity transactions, capital goods and finished goods. Alternatively, open-account transactions pertain to investment-grade buyers.
Win-Win Possibilities for Regional and Global Banks
In order to take advantage of these opportunities, regional and local banks—even the biggest and strongest of them—will have to learn portfolio management techniques from their larger international banking peers. Those include setting-up true-sale infrastructure instead of traditional unfunded risk mitigation via private insurance and/or participation structures; partnering with development financial institutions (DFIs) to use their risk mitigation tools; managing their loan-loss-reserve especially over month-end/quarter-end and optimizing their bottom line; finding industry trends to manage concentration limits and optimize Risk Weighted Assets using algorithms and/or artificial intelligence; and working on possible structures to quality trade assets as high-quality liquid assets (HQLA) as per Basel requirements. Finally, they’ll need to ensure that portfolio management and distribution teams are well-connected and working in synch rather than at cross-purposes.
While most treasurers/CFOs of global multinationals work with their top 10 ‘relationship’ banks (usually global banks), there is an opportunity for them to expand their international operations via 1-2 regional banks in each geographic region. This will not only help them grow their international operations, but also provide a better understanding of the local lay of the land.
Regional banks can help these global multinational corporations manage their credit risk while at the same time grow their regional in-country sales and augment revenues. While some of this might already be happening in the industry, with growing globalization and trade/tariff instability, it might need to be accelerated to get the maximum benefits.
International trade finance presents incremental opportunities for both regional and international banks. Regional banks can expand their portfolios and market share by exploiting niches overlooked by their global counterparts and international banks can deepen their penetration of national and local markets by partnering with regional banks who enjoy local trust, credibility and familiarity.
About the Author:
Anurag Chaudhary is the CEO of Pinnacle Trade Finance Limited, United Kingdom. Prior to that Anurag was working at Citibank as Managing Director and Global Head – Trade Distribution & Syndications and Regional Head – FI Trade Origination/ Sales team based out of Citibank’s London Office.