Kazuo Yoshimura, General Manager and Global Head of Trade Finance at SMBC, a major global trade finance bank, shares his views on some of the current trends in the industry.
Q: Please summarise SMBC’s trade finance business.
Yoshimura: SMBC provides a wide range of trade finance solutions to its clients globally, including supply chain finance related to receivables and payables, export finance utilising various export credit agency (ECA), multilateral agency (MLA) and development finance institution (DFI) programmes, as well as commodity finance to producers and traders across a broad range of commodities. Based on client needs, products may be combined into tailor-made solutions and enhanced through digital technology.
Q: How does SMBC see the digitalisation of trade playing out, and what initiatives is the bank involved in?
Yoshimura: The use of digital platforms and blockchain technology in trade finance is gradually becoming more widespread.
Traditionally, trade finance relies upon manual checking and processing of documents. Most banks are adopting technology such as Robotic Process Automation, linking digital trade platforms with in-house systems to make full use of distributed ledger technology, as well as investing in workflow management and ‘intelligent’ process automation solutions to reduce manual touchpoints and shorten processing times. Reducing overall transaction costs also serves social goals as banks can offer trade products and services to a broader customer base, including in less well-banked markets.
The trend is towards collaboration among market participants to build an open, digital-first, global trade ecosystem.
SMBC is committed to the digital transformation of global trade, strategically investing in and partnering with best-of-breed complementary platforms.
In 2021, SMBC became one of the few institutions to both invest in and go to market with Contour, Komgo, and Marco Polo Network, the three leading trade finance platforms. SMBC was the first to go live with Marco Polo Network in the Americas and is now actively funding receivables financing programmes on Marco Polo Network across multiple regions, with plans to add payables financing products and to expand into other major markets in 2022. In 2021, SMBC launched Contour’s blockchain-based digital letter of credit (LC) platform in Asia, which began trading in December, and reduces the typical LC processing period of 7 to 14 days to under 24 hours. The benefits include reduced administrative overheads, accelerated turnaround times, real-time data sharing and enhanced information security. SMBC is also an active user of Komgo, with volumes exceeding US$3bn by the end of 2021 and set to expand further.
Q: What have been the efforts of banks to promote sustainable development goals?
Yoshimura: Environmental, social and governance (ESG) goals have long been part of the remit of ECAs, and whilst the environmental component remains the main focus, the social aspect is becoming increasingly important. It includes affordable housing, human rights, employee health and safety, inclusion, water and sanitation, with healthcare a high priority in the context of the Covid pandemic.
ECA-backed structures play a vital role in supporting ESG and the energy transition, where western and emerging markets are equally important, and governments are directing ECAs to make their programmes more flexible.
Supporting the development of small and medium-sized enterprises (SMEs), promoting gender equality, sustainable economic development and broader goals through trade finance are fully aligned with SMBC’s objectives. An example includes a sustainability-linked facility for an agricultural commodity trader backed by inventory and utilising Komgo to mitigate fraud risk and make the customer’s operations more efficient when aiming to help clients respond to environmental challenges.
SMBC is strategically focusing on ‘green’ finance through various structures such as supply chain finance to support renewable energy and the electric vehicle battery sector, and in the social sphere partnering with regional development finance institutions in Africa and elsewhere to contribute to the production and distribution of Covid-19 vaccines.
Promoting measures to reduce climate change can take many forms. As well as renewables, improving energy efficiency, reducing energy losses in the distribution network, and installing means to monitor emissions are all projects that attract support from ECAs. Structures include sustainability-linked loans which reward borrowers for measurable improvements. The first such loan for SMBC was for British Airways, part of an initiative of UK Export Finance aimed at tackling the high carbon footprint of the aviation sector. The Cop26 climate change conference has generated strong pressure to continue the energy transition to which governments have committed and this is expected to translate into a strong focus by banks to support relevant projects.
Q: What are some of the challenges in ESG projects?
Yoshimura: The energy transition will require new, unproven technologies, which without ECA support might be beyond the risk appetite of banks. Banks are also mindful of greenwashing or ‘sustainability washing’ and therefore expect rigorous independent verification, underpinned by consensus on the definitions of indicators and clear reporting requirements.
Q: What recent trends has SMBC seen in the structured export finance market?
Yoshimura: Whilst the number of traditional deals in sectors such as oil and gas, aircraft or shipping has decreased due to a combination of efforts to address climate change and the impact of Covid, agency-backed loans are still an important and competitive component of SMBC’s product offering.
ECAs, MLAs and DFIs have been developing new product offerings reflecting evolving market requirements, focusing on the overall national interest. These ‘untied’ programmes may support, for example, imports of critical raw materials into the ECA country, promote future exports and open access to target markets. Untied programmes include Nexi Lead, Sace Push and K-Sure Untied, amongst others, with DFIs significantly contributing to the promotion of ESG financing.
Advantages of the structured export finance product include its capital efficient nature due to the lower risk generated by the agency cover, and that it is highly distributable in primary and secondary markets.
Q: What are some of the supply chain finance trends on your radar?
Yoshimura: Whilst widespread among major retailers and manufacturers, typically involving a large number of suppliers including SMEs and often on a cross-border basis, supply chain finance has a wide range of applications beyond financing daily flows. For instance, it can be an alternative solution to loans in construction projects. Recently, SMBC established a supply chain finance facility for a renewable energy company as a solution for raising funds for the construction of a wind power plant, and this can be extended to other sectors. Major commodity traders and commodity-related companies have also increasingly introduced supply chain finance to support their import and export trade flows.
Supply chain finance as a solution for improving cash conversion cycles and balance sheet management is also becoming more prevalent across regions, having originated primarily for large US retailers and manufacturers, but now widely used in European and Asian markets.
Due to its typically high-volume nature and multiple parties, supply chain finance is ideal for digitalisation using various trade platforms. We expect to see sustainability-linked supply chain finance programmes partnering with evaluation agencies and more advanced programmes with some functions of traceability information, for example backed by blockchain, appear in the market.
Q: What developments are taking place in the commodity space?
Yoshimura: Volatility, uncertainty and market disruption characterise many commodity sectors globally, and with it changes in strategy by commodity traders. SMBC remains committed to its clients and to growing its capacity as a leading global commodity finance bank supporting a wide range of trading companies, from the mid-sized specialist product traders to the globally-integrated major trading houses, plus regional and global producers and consumers of commodities.
SMBC has expanded its global commodities team, focusing on the entire supply chain, and increased its global capacity through both organic growth and acquisition of new facilities and relationships. The bank is also widening its spectrum of sectors in energy products, agricultural commodities and metals. We offer the full range of products including bond issuance, securitisation, swaps and deposits as well as trade finance products such as borrowing base lending, accounts receivable purchase, guarantees and working capital funding.
SMBC has consistently been ranked a top-tier bank in major league tables regionally and globally for commodity finance, has adopted digital solutions for commodity clients with partners including Marco Polo Network, Komgo and Contour, resulting in significant transaction volumes being processed through these channels, and is reviewing the potential of other fintech applications.
SMBC supports commodity traders and producers in their energy transition and wider ESG objectives. Examples include sustainability coordinator roles as well as funding clients’ investments in renewable energies and new technologies. Notable cases include a mandated lead arranger role in Trafigura Group’s US$2.4bn-equivalent sustainability-linked syndicated revolving credit facility and term loan; a US$1.14bn LNG borrowing base facility for Gunvor, including first-of-its-kind scope 1, 2, and 3 emissions measurement commitments; as well as partnering with IFC in supporting Iraqi energy producer Basrah Gas, financing the world’s largest gas flare reduction project to capture gas for domestic and export purposes. SMBC is furthermore supporting its clients’ renewable energy efforts, such as a mandated lead arranger role in a US$376mn multi-project financing package for Lightsource BP for construction of its 293MW Sun Mountain solar project in the US.