Australia’s banks are gaining ground in Asia as European players lessen their activity in the region, writes Laura Benitez.
As the European debt crisis deepens, Australian banks are once again in a strong position to step in and maintain Asia’s trade flows.
Europe’s commodity demand is waning and the funding costs of European banks are rising, all of which provides Australian banks with opportunities to secure Asian trade.
Australian banks stepped in to finance Asian trade during the 2008 global financial crisis when the US and the UK were pulling out of the region. As a result, Australia and China grew closer as trading partners in response to new trade flows that both countries were keen to maintain.
Gordon Sparrow, head of trade sales, global transactional services at Westpac agrees: “I think we found a niche in the Asian markets when US banks became less liquid and more credit conscious. We were able to cover the gap fairly well but the demand is insatiable so there’s plenty to go around. When the US and European banks recovered they were able to come back and trade comfortably.
“Although since then, and with the current eurozone crisis, European banks have pulled back dramatically and so once again we’re in a strong position. We have the commodities China requires for building its infrastructure and with Australia’s resources and capability it will continue to meet that demand and tap into the required source of liquidity.”
National Australia Bank’s (NAB) head of trade for Asia, Michael Hogan believes that Australian banks have cause for optimism: “It would be normal to expect the economic events unravelling in the West to have an impact on the trade financing markets across Asia, and this is proving to be the case. Many of the biggest European banks have strong histories in the trade and commodity space, but the ongoing liquidity crisis has forced even some of the strongest to pull back.”
Mark Evans, global head of trade and supply chain at ANZ, explains that although wholesale funding costs for Australian banks have increased, they still remain well capitalised, have minimal direct European sovereign debt exposure and have recently had their Standard & Poor’s ratings confirmed at AA-.
He adds: “Australia is certainly stepping in to ‘help’ fill the gap left by European and US banks. Relative to many other banks, the cost of funds for the Australian banks, although increased, compare favourably.”
Natural resources appeal
However, Andrew Wright, NAB’s global head of natural resources, believes that European banks still have appetite for deals in Australia’s natural resources sector, though mainly for projects with top-tier corporate involvement.
“There is much press around the withdrawal of foreign banks (particularly European and US) from Australia. While there is some truth to this, we are still seeing active participation from these banks in high quality Australian resource projects.”
Michael Reidy, Commonwealth Bank of Australia’s (CBA) head of trade and working capital finance, global transaction services agrees: “In terms of Australian trade flows we do not see an issue around market gap. Outside the main four Australian trading banks a range of US, UK, European, China, India and Asian/Middle Eastern banks are operating in the domestic market. The market is very diverse and competition in trade and working capital finance remains fierce.”
NAB’s head of resources and project finance David Lloyd, also believes that lucrative Asian deals will continue to attract European investment: “Although Australian banks are definitely stepping up to finance transactions, I’m not sure about filling the gap left by Europe. I’ve yet to see a strong commercially viable project fail to get financing from at least one source; the sources change over time and they currently include export credit agencies (ECAs) and the capital markets.”
Indeed, Australian banks will need the support of their European counterparts. According to the Bureau of Resources and Energy Economics (Bree), there were 102 Australian-funded projects at an advanced stage of development by the end of October 2011. This amounts to a capital expenditure of A$231.8bn − an increase of 74% from October 2010.
In 2010/11, exploration expenditure in Australia’s minerals and energy sector totalled A$6.2bn, a 9% increase from 2009/10. Meanwhile, investments in mineral exploration continued to strengthen, with Australia recording its second highest annual mineral exploration expenditure in 2010/11.
New capital expenditure in the mining industry totalled A$51bn in 2010/11, a 28% increase from the year before. Looking ahead, Bree predicts that capital expenditure in the mining sector could reach up to A$80bn in 2011/12.
Coping with demand
As the volume of Australia’s investments in LNG, metal and mining projects increase, Australian banks will need to prove that they have the capacity and resources to fund these projects.
NAB’s Wright says that although Australian banks remain an important pool of debt capital for domestic resource projects, the current requirement completely dwarfs the capacity of the Australian bank market alone.
“Successful development will absolutely require continued access to the global capital markets. The ECAs are a big pool of available capital for these projects – particularly those that are using project finance type structures. However, many of the largest projects are being developed by global corporates such as Exxon, Chevron, BHP – and they are just using their respective balance sheets and accessing normal capital markets to finance them,” Wright adds.
CBA’s Reidy comments: “The funding of these investments will match the nature and life cycle of the underlying assets as well as the requirements of project sponsors. Corporates could expect to support a mix of government, public and private equity, bank and ECA funding. The key driver will be the potential of the investment and the overall economics including the state of world markets and supply and demand issues. I would expect some investments/projects may not proceed in line with ongoing project evaluation and investor appetite, but his is normal.”
NAB’s Hogan explains that with regards to the shorter tenor commodity export business, Australian banks are definitely stepping up to help facilitate trade flows in terms of managing the risks, financing trade and increasing their presence on the ground across Asia.
“Trade business at NAB, especially in Asia, is seeing significant increases in volumes. Values and utilisation levels of facilities are also very positive. There are always new challenges to be faced with growing businesses. That said, in view of the on-going global crisis, it’s a preferable problem to have,” Hogan says.
Reiterating this sentiment is confirmation from ANZ’s Evans, who explains that export flows from LNG projects are “starting to come on-stream, with significant future volume under development”. He reads this as an indication that the demand for export flow-related trade finance is starting to emerge.
NAB’s Lloyd also believes Australian banks have what it takes to cope with the heavy demand. “A recently closed project finance transaction, Wiggins Island coal export terminal, demonstrates the capabilities of Australian banks and their capacity to structure and fund large transactions,” he says.
The Wiggins Island facility, which is the largest Australian project finance deal last year, was arranged and financed by a club of international and development banks, ECAs and local lenders, including all the major Australian banks. It was also the first time that Australia’s ECA EFIC was involved in financing an onshore transaction.
Lloyd adds: “It was the largest greenfield financing in Australia last year and it raised around A$3bn in debt. I think it’s a reflection of how we’ll see large project financings work over the next year or two.
The breakdown of this deal is quite interesting as we also had direct lenders, such as Canada’s EDC, Germany’s KfW, China Development Bank and Korea Development Bank, so there was substantial export credit and development bank involvement which accounted for approximately 25% of the total funding.”
However, Will Rathvon, ANZ global head of natural resources, explains that the sheer size of the investments needed to support the level of capital expenditure required by resource companies over the next few years will be challenging.
He continues: “This is compounded by the latest iteration of the global financial crisis and the European debt crisis contagion, which has already reduced the pool of financiers – particularly amongst European banks who have traditionally led or participated significantly in transactions in the natural resources and infrastructure sectors globally.
Although the Australian banks are expected to play a significant role in financing the large mining industry projects that are under development, given the sheer size of the task it will be completed by a combination of local and foreign banks, combined with ECA supported funding and debt capital markets.”
A helping hand
Although Australian banks are among the best capitalised banks in the world and have maintained strong relationships in Asia, ECA support will play an increasingly important role in closing deals. It will prove crucial for riskier long-term deals, especially if demand for Australian commodities continues to grow.
Westpac’s Sparrow explains: “ECA support is absolutely essential. Without the support of ECAs it will be difficult for the Australian banks to provide a long-term trade cycle.”
ANZ’s Evans adds that although ECA support is relatively new to the Australian market, they are seeing more and more ECA-supported financing opportunities to complement bank market appetite.
“We are also seeing significant interest in and demand for ECA financing from top-tier customers operating in the resources and infrastructure segments, which are core strategic segments for ANZ’s institutional business. We are well positioned across the Asia Pacific region with ECA-backed, structured trade capabilities to support pre-export finance, upstream and downstream bonding requirements,” Evans says.
While everyone is in agreement that ECA-backing is imperative, NAB’s Hogan outlines the responsibility Australian banks have in tapping the required resources for their customers.
“Given the required investment levels and tenors going forward, the ECAs will have an increasingly important role to play in this space. Projects valued in tens of billions of dollars require effective cooperation and collaboration between all the industry players. Whilst banks might not have the resources individually to help finance these deals, they do have an obligation and interest in helping arrange these on behalf of their clients.”
Meeting Asia’s needs
The growth in China, as well as other Asian economies such as India and Indonesia, has had a significantly positive impact on the Australian economy, especially in natural resources and agriculture. As the relationship between the two regions strengthens, investments in significant mining projects and related infrastructure will increase.
Indeed, China’s influence on Australian business is “potentially transformational”, according to Hogan. He explains that under normal circumstances, the volume and value of energy-related exports are significant but figures seem to be ever-increasing.
In 2011, Australia’s total exports to China were close to A$60bn, two thirds of which was energy related, namely iron ore and coal. These flows have shown growth rates in excess of 30% a year over the last six years, while last year’s growth was a staggering 37%.
“Conversely, but related, China’s investment into Australia has increased fivefold in five years. Both countries need each other and the banks have a role to play in servicing this. If we can help our clients by positioning ourselves as a key facilitator in these international supply chains, we foresee a picture of long-term sustainable flows and growth opportunities,” Hogan believes.
Sparrow concurs, expecting strong Australia-China trade flows to continue. “It’s predicted that by 2020, 50% of world trade will be with China and, with Australia being as well-positioned as it is and with its wealth of natural resources, it will always be a favourable trading partner with China. We have the commodities China requires for building its infrastructure and with Australia’s resources and capability it will continue to meet that demand and tap into the source of liquidity required.”
China’s infrastructure is indeed a problem. The country’s transport system, particularly its railways, struggles to support internal trade. This is particularly true of large cargo commodities, such as coal. As these problems persist, China will continue to rely on Australia’s commodities, especially as China’s consumption of coal is expected to increase.
Hogan says: “From a trade and investment perspective, there’s a growing mutual interdependence between the two countries. Australia is perfectly placed to continue to be a major source of strategic commodities to support China’s industrialisation and urbanisation. This applies to not just the fuel and energy sectors but also food.”
As foreign investment into China decreased by nearly 10% in November, China will be seeking to attract new flows of investment from Australia. In the face of this, banks continue to arm themselves with plans to expand into the region and increase their workforce.
Hogan says that NAB is increasing its presence across the Asia region by strengthening its client and product teams further, the latest developments being the expansion into Shanghai, Mumbai and Jakarta.
“China and India are key trading and investment partners. Having strong teams on the ground there gives us a great platform to service our clients, and our clients’ clients, in the same supply chain.”
Lloyd also confirms that NAB is increasing its business focus on resources, particularly project finance, to meet the potential opportunities in the mineral sector.
“We’ve increased our staffing in the natural resources project finance team from the beginning of the year from three to seven people, with the possibility of adding more. I believe this is true of the other Australian banks too, and that is because we are all responding positively to the demand for additional capital.” GTR