GTR gathered its Americas editorial board on the sidelines of its annual New York conference to discuss how business is heating up across the continent.
Alexander Blodi, North American large corporate sales manager, global trade and supply chain solutions, Bank of America Merrill Lynch
Chris Bozek, managing director, global head of trade and supply chain products, Bank of America Merrill Lynch
Silvia Brudar, vice-president, product management & business planning, Scotiabank
Vernon Darko, president, EquipXP
Sébastien Delasnerie, managing director, trade head for North Americas, treasury & trade solutions, Citi
Josie Forde, managing director, treasury services, market management, BNY Mellon
Don Harkey, managing director, trade credit and political risk division, Arthur J Gallagher
Jack Leong, director – head of trade finance sales, North America, Deutsche Bank
Maureen Sullivan, managing director & North American trade sales head, GTS, Bank of America Merrill Lynch (chair)
Mariano Urquiola, head of global transaction banking sales, Santander
Many thanks to Bank of America Merrill Lynch for hosting this roundtable at their New York office
Sullivan: The interest rate environment is clearly one that continues to surprise us. What has been the impact of the current interest rate environment and the rising dollar on your business?
Urquiola: There is no question that there is lots of liquidity in the market. We see that liquidity not only within the banking industry, but also at the corporate level. There are many corporates out there that are literally cash-rich, and, consequently, their working capital needs may be lower.
One of the effects that this excess liquidity and cheap prices environment has is that banks are still looking to generate revenue, and therefore, the competitiveness in the market has also transferred to the unfunded business, such as the letters of credit.
Pricing is hitting rock-bottom now; that is my personal view, at least. There are different drivers: banks are choosing better how to deploy their liquidity and their capital while others are undergoing risk-weighted asset reductions. Many banks, which were at first using RORAC returns to decide whether to enter a transaction or not, nowadays are looking at other metrics, such as revenue against risk-weighted assets, which, a year ago, was not a metric that banks were using that much.
All that, coupled with the fact that the market has already signalled that the Fed will start increasing the rates, makes me think that the pricing should start going up. The question always is when. That is the tough part. If I were to take a shot at that, I would say that within the next 12 months we should see an uptick in the pricing.
The strengthening of the US dollar is obviously putting a lot of pressure on US exporters. Not too long ago, I was having a discussion with a local client who is active in the foreign market and he was saying that the strengthening of the US dollar was curbing, up to a certain extent, some of their capital expenditure plans. This could possibly limit their capacity to engage in projects that may involve an ECA financing which we could have potentially offered to that client.
Brudar: In the transactional services business in general, this prolonged lower interest rate environment has compressed margins. Moreover it has been impacted by compliance-driven costs and technology-related spending. It is broadly believed that interest rates in the US will increase later this year. However, in addition to interest rates, China appears to be one key economic factor impacting trade activity.
On the other hand, the growth for LatAm at the end of the commodity super-cycle was limited. As a result of reduced growth in this region, companies have moderated investments, both domestically and globally, and exports have decreased, affecting local public finances. Due to this, fiscal policies have tightened, thus impacting consumer spending. However, despite the lower trade activity, spreads continue to be stable.
Bozek: This is the third year in a row we are at this table forecasting an imminent interest rate hike. Hopefully we will not be having the same conversation this time next year. Banks and corporates are facing identical market headwinds, including the increasing value of the US dollar. This time last year, the euro was trading at 1.40:1.00; it is now trading at 1.12:1.00. The more expensive US dollar is impacting the size and amount of the products purchased and sold. Smaller transaction sizes and thinner spreads are challenging the banks to originate more deals while broadening out the transactions, including, for example FX, and other payment flows. As other economies around the world implement stimulus packages, the US dollar is likely to strengthen even further. I agree with your comments on LatAm. China’s impact on south-south flows is significant. The reduction in commodity prices is directly impacting infrastructure investment in LatAm, most notably, Brazil, Mexico and the Mercosur.
Sullivan: Sebastien, have you seen any change in volumes or activities? If we look at the US export market, given the appreciating dollar, is that hurting some of your clients in terms of their export activity?
Delasnerie: No, not yet. It has been fairly stable over the last 12 to 18 months. We still see a lot of capital coming into the North American market. Obviously, when Europe offers negative yield, the money has to find somewhere to capture returns, and so we still see a lot of influx in North America that is maintaining pressure on spreads, and, as far as I can see, will continue to do so for the foreseeable future. In terms of activity with our client base, we still see a lot of outbound demand, and we have not really experienced any major slowdown in activity.
Sullivan: For the exporter in the room, are you feeling the pressure on margins as a result of the dollar?
Darko: We are feeling some pressure on margins; however, we have been passing our margins on to the client. Also, the oil price coming down is affecting some of our clients, so the pricing becomes very key now in terms of trade.
Sullivan: In the trade credit risk environment, what do you see?
Harkey: We are really talking about margins in general, in my opinion, not rates. There is too much credit capacity in the marketplace, with everybody chasing the same credit quality, because we find ourselves in that transition where banks are saying: ‘Hey, I don’t want to lend to the guy on the street corner; I want to lend to IBM or a comparable credit quality customer.’
From my perspective, there is plenty of capacity in the insurance marketplace to take care of those credit quality names, but we do not have any buyers. We have been on an eight to 10-year run, a good run in terms of premium versus claims paid. The economy has been very strong; I am sure you have experienced the same thing. We find more insurance companies coming into the market; why, I do not know. We already have way more product than we can sell, so it is a problem for us. Until margins improve or there is some deterioration in credit quality that drives bankers and manufacturers towards the insurance industry, we will continue to struggle in this industry.
Forde: Does it not also depend on specific markets? There are certain markets, for instance, that you would think would be priced higher because they are higher risk. However, rational pricing may not occur in certain markets, for instance where you would expect spreads to be higher but they are actually thinner.
Sullivan: Let us move on to one of my favourite topics: regulatory and compliance issues. I would say, five years ago, I might spend 1% of my time every day thinking about regulatory and compliance issues; today, it is probably closer to 10 to 20% of the day. I thought we could have a little discussion on Basel III, how each of you is viewing it and how you are seeing it impact some of your trade finance opportunities.
Leong: With regard to new regulatory capital requirements, for investment grade companies and other companies that are used to low pricing in the marketplace, Basel III has created higher return hurdles in particular for funded transactions. I do not think pricing has moved yet to reflect these increased hurdles, but there should be upward pricing in the market.
Sullivan: Do you think the corporates understand that this is going to be a cost, eventually, that they are going to absorb?
Leong: I do not know. We tend to have conversations with clients around regulatory changes and structures, where we are trying to create Basel III-friendly type transaction structures that take into account what costs the banks are experiencing now. The questionis: can banks continue to do that over time?
Urquiola: Basel III is now a recurrent topic with our clients, particularly around letters of credit, impact on leverage ratios and off-balance sheet transactions. I fully agree with the fact that the banks are redefining the way that they are doing business, and as I pointed out earlier, this could result on an uptick in the pricing. If capital and liquidity requirements on trade finance solutions increase substantially, some banks that don’t have access to competitive liquidity could steer away from the business impacting the trade growth.
Brudar: We need to understand that there are costs associated with regulations such as Basel III. Customers should be aware of the requirements that we have to meet in order to protect them and other banks. A separate question is how much of that cost can eventually be passed on, and those decisions will be market-driven. In Canada, internal conversations have shifted and regulatory requirements seem to
have stabilised in terms of new regulations that require investment.
Delasnerie: There is a fair level of awareness within our client base, especially at the large corporate level, which is probably as a result of all the conversations we all are having separately with them. We find that the clients’ concern in relation to regulatory pressure is primarily with the sustainability of the bank offering: Is the bank committed to that particular segment and will it be there next year and the year after?
Bozek: Compliance costs go beyond Basel to include what can be termed ‘conduct compliance’. I am referring to AML, KYC, FATCA, and so on. These costs, coupled with Basel, have certain banks considering whether they can afford to continue offering fringe products and services in all markets to all clients. Increasingly, banks are asking ‘can we better compete by narrowing our products, or market reach’?
Perhaps the most visible impact to our clients is in the amount and frequency with which we request data from them to comply with KYC and authentication procedures. We have to be smart about how – and how often – we request this information to minimise client disruption.
Specific to Basel III, one result of the regulation is that banks now look at a myriad of metrics, not just risk-adjusted return on capital. Today, by contrast, banks are having strategic discussions around the firm-wide impact of deploying assets at the client and market level.
Sullivan: Are we, as an industry, doing ourselves any favours? I know Swift has an initiative to try to bring some uniformity to KYC, but it seems like it is very slow going. Should we take a more proactive approach from an industry perspective to say: ‘We all want to be in compliance. There is no doubt. There is no benefit for us not to be in compliance with the local jurisdiction’s rules around KYC and AML, but there has to be some applicability or sense of normalcy from one region to the next, one country to the next.’ That is where, as Chris commented, we are getting punished by not being able to comply because it is just too difficult. What can we do as an industry to spearhead that?
Delasnerie: The banks would certainly benefit from coming up with their own standards to submit to the regulators. It would give the industry greater visibility as to how to best resource existing and future requirements in this field. I believe that, unless we get in front of it and make a joint proposal on some standards, we will continue to bear the cost of organisational inefficiencies created by the absence of publicised consensus. It would certainly be a big effort, but one that would bring great benefits to the banking industry as a whole.
Bozek: Swift is actually in the early stages of developing a KYC registration utility specific to FI authentication. Our bank is a founding participant in this initiative. A similar, corporate authentication is a more daunting task.
Many of us are also involved in industry-led KYC/AML projects with Swift, BAFT, and others. To your point, though, ICC endorsement would help advance the effort. One area in which we can help ourselves – and where I think we are collectively doing a better job – is having consistent client messaging about the data we are requesting, why we are requesting it, and more importantly how the exercise will protect them. 18 months ago, we often heard our clients complain about the request, saying that their other banks were not asking for the same volume of information. It seems that today clients are increasingly used to the request and less likely to raise this as an issue. Do you agree?
Leong: I would agree. I think that clients are coming to an understanding that the process is a challenging one. If the industry could get to a point where standardisation takes place, there would be a lot of benefits. One of the sore points for clients in general
is the onboarding experience.
Sullivan: There is no reason not to want to be in compliance. The challenge we all face is dealing with the level of complexity and lack of clarity in the different jurisdictions, the effects of which we inevitably have to pass on to our clients. I do think there needs to be some sort of industry leadership.
Blodi: Until there is that standardisation, a repository does not really help, because we are still asking for different things.
Delasnerie: It is going to be challenging for the authorities to agree that banks not own the source data and rely on third parties. There is more value in having a consultative group of bankers look at the regulations when released, and come out with a white paper that articulates common issues and concerns in order to facilitate a collaborative engagement with the authorities.
Brudar: The industry-wide solution to gain better clarity on global regulatory requirements is probably best conducted through industry associations like BAFT or ICC. It appears that strong regional banks are the future of banking and the reality is, with our correspondent networks being shrunk, we need each other now to partner in the delivery of global solutions to our customers.
Forde: I hear it from other regions, banks talking about partnering as the way they can make themselves more global. The question is how to make it work.
Sullivan: As banks are under more pressure to de-risk, the fear I have is that that could have an impact on the trade business specifically. If we are not able to deepen and broaden our FI relationships, we may not be able to satisfy our corporate and commercial clients’ cross-border needs. It is definitely becoming a catch-22 situation.
Moving on: I thought we could spend some time discussing supply chain finance, a topic that we’ve discussed at this roundtable for the past three or four years, due to the product’s continued upward trajectory growth. Is anyone seeing any slowdown in the market? Is there still the same level of uptick? Are clients understanding and embracing it more, or less? Is there any change in complexity or any increase in go-to-market challenges that you may be facing?
Delasnerie: We still see a very robust demand for supply chain finance in North America, which is arguably the most mature market, but also in other regions – Asia in particular.
For what used to be a somewhat specialised offering, along certain industrial verticals, the acceptance is now broader across industries and we still anticipate a strong demand for the next few years. Not too long ago, we still had to educate clients on what supply chain finance was, and how it worked. The focus has now shifted to execution, the strength of the platform and the prevailing industry landscape.
Blodi: We are also starting to see certain trends. For instance, beverage companies have put some programmes in place and extended their packaging companies; now the packaging companies are looking to extend their suppliers, so you are starting to see an expansion in terms of opportunities. As more people become exposed to the product, whether it is as a supplier or a buyer, they begin to understand its value.
We are also seeing, post-crisis, more and more CFOs with working capital goals built into their annual initiatives. It is a huge driver for the business when you have that at the top of the house. That has also been something that has been driving the business, in our view.
Delasnerie: In addition, suppliers that benefit from a programme availed by one of their buyers will go to their other customers and ask for similar facilities in order to scale the working capital benefit. You have what you could call a ‘snowball’ effect: the more you execute, the larger the demand for the product.
Brudar: Regarding customer benefits, we have experienced that cashflow and financing benefits are a result of discussions around the following: convenience of access channels, service, and information transition mechanisms. Customers need to see the full picture in order to determine whether a proposed solution makes sense for them or not. The biggest motivation is the use of data analytics and intelligence, both internal and external. When talking with a customer, we need to know as much about their business in terms of their transactions, who they pay, how and when, and the frequency. We can see this in a strategic analysis of our internal data and, if possible, overlay this information with external data, to obtain an even more robust picture.
In terms of a value proposition, we still focus a lot on ‘why’. The awareness out there differs by customer segment. In the corporate context, most customers have heard about supply chain finance and they can relate to it better, but, if we go to the upper end of the small and medium-size space, there is a limitation in the awareness.
Delasnerie: Another fairly recent headwind consists of the significant cash reserves that companies have on their balance sheet. When you come in with a solution that generates yet more cash, which may not yield any return, it can be a challenging proposal. Thus you need to come up with something that differentiates your solution and captures the client’s interest.
Brudar: We can be even more relevant to our customers by segmenting the overall customer solution. Sometimes, depending on the size of their suppliers or buyers, you go from portfolio financing, to transaction financing, to perhaps just electronic invoicing.
Bozek: As the product matures and becomes a core working capital tool for corporates, both buyer and supplier requirements are becoming more complex and more sophisticated. Savvy suppliers are adopting the programme for themselves as buyers, and this is benefiting all of us.
However, banks will need to continue to invest in their offerings to keep pace across multiple developments – including the globalisation of national programmes, and further integrating the solution with a client’s ERP system, or with other with products such as cards and ePayments. The investment goes beyond the technology and the platform; it requires investment in people who have local subject matter expertise; developing the required legal documentation for local jurisdictions; and expanding global onboarding capabilities.
Sullivan: Sebastien, you made an interesting comment that, when you are in a conversation with a client that has excess liquidity, the question becomes: why would they launch supply chain finance since that would give them even more excess liquidity? Are you seeing any trends with your clients who are passing on bank-funded supply chain finance programmes, and instead deploying their excess cash in a dynamic discounting environment or doing self-funded supply chain finance programmes?
Delasnerie: Certainly. These conversations are taking place more and more often, usually as part of a supply chain finance dialogue. Dynamic discounting is typically not a core bank offering and there are quite a few non-bank providers out there pitching these types of solutions. However, dynamic discounting does have a role to play in the larger context of the corporate payable continuum, and banks can leverage their capabilities to deliver to the client the benefits of an integrated solution.
Harkey: We are seeing similar things on theinsurance side, and it is a range, from manufacturing to technology to PE companies. Anybody that has cash is looking for a way to deploy that cash and create yield. There is no mystery there, but we are finding that some of our clients that are sitting around with a lot of cash will create captive or non-captive finance companies, trying to find ways to finance their clients.
If it is supply chain-driven, then so be it. If it is working capital loans that help them buy more product from the client, so be it. The whole concept of providing financing to employ some of this cash in helping their clients and creating stronger relationships is quite bold out there.
Darko: I have been approached by a couple of large companies to see how best we can use some of their funding to fund trade so I see that in the marketplace. I do not know if that is also affecting the banks. There is a lot of private equity money out there as well that is looking to be put somewhere else, just to find good deals and ways to deploy it. We see and hear that in the marketplace. What is your perspective?
Bozek: We’ve seen a number of new auction platforms being launched to cover what is best termed as transactional lending. The emergence of these services has highlighted the need for FIs to determine which parts of the market they wish to play in. Are you going to be a relationship lender, a transactional lender or both? Typically, banks have focused on relationship lending. SCF is a good example: FIs invest in establishing and managing the programme with a long-term focus on repetitive, strategic sourcing suppliers to meet their buyer client’s objectives.
The bank’s goal here is to increase their overall value to their client as a broad-based services provider.
Conversely transaction lending is episodic, and based on the revenue opportunity of each transaction. The new providers in this space are now challenged to manage beyond the technology, dealing with regulatory requirements, the global onboarding capabilities, and local subject matter expertise required to expand in new markets. Longer-term, the required investment to meet these needs will likely result in a consolidation within this space.
Harkey: I have seen a considerable number – five, six or seven this year alone – of PE companies trying to find a niche and a space they can play in that commercial banks exited maybe two, three or five years ago. Companies that want to buy LNG storage equipment create a leasing company and lease to companies that might be struggling. Again, they are going down market; they are trying to find that niche where the commercial banks have exited, but they can also get margin there. When I talk to them about insurance, I am shocked, because they are deploying US$1bn or US$3bn; if they do this three or four times, all of a sudden it is real money; it is US$10/15bn, and they all say: ‘We like the risk. We are comfortable with it.’ When you talk about regulation, these guys all say: ‘What regulation? We don’t have any of this stuff.
We are operating on the free and easy.’ They enjoy that environment.
Brudar: I think these developments are actually positive, because all these companies, whether it is Alibaba, GE Capital or UPS Capital, have very different access to capital, risk thresholds, appetites, and business models. They provide liquidity in a space where we would not necessarily operate, because we are customer-focused and see relationships on a holistic basis, across numerous products and services. All these alternative trade finance options prefer to finance one-off transactions, so it is a very different business model. We would not necessarily operate in that space of invoice financing, peer-to-peer trading platforms or crowdfunding. But that works in their favour for now, since they are not required to comply with comparable regulation and they can be fast and flexible in terms of new technologies that they can figure out almost overnight.
Sullivan: To the point about innovation, does anyone have a comment on the BPO? Is it taking off?
Blodi: To me, it feels a little like the origins of supply chain finance, where there are a lot of educational conversations occurring but not a lot of transactions yet. Hopefully, they will follow.
Leong: A number of banks in the room probably have clients who are ready to move; it is a question of whether their suppliers, buyers and partner banks are ready. The challenge will be achieving critical mass by getting all parties to buy in and gain access to the platform.
Sullivan: Moving on to ECAs: how will the US Exim scenario impact US exporters, and how will this play out onto the world stage? I am really curious to hear how private credit insurance is responding to this.
Harkey: From a practical point of view, US Exim has done a tremendous job in the SME space. If there is such a rechartering or further licensing of US Exim, it will probably be focused on the SME and growing the small business sort of programmes. If you take that off the table, I would say that the private insurance community continues to do an extremely good job in terms of being able to bring capacity to the table, to price correctly. We talked about de-risking, using private insurance as a means of reducing capital allocation. We believe that legislation allows you to do that through the substitution mechanism, with some changes required, of course. I just believe that the private insurance community can write 10-year and 15-year paper. We have carriers that can write US$100mn limits on a transaction or an obligor.
If you put two or three of these guys together, you can write US$300-500mn credit limits. That is not to say that they would, mind you, but I am just saying that they have the capacity to do that.I think the private insurance community is well-positioned to pick up and maybe even do better than US Exim. I have been doing business with the bank since the late 1970s, and the theory has always been: where US Exim works, it usually works extremely well, but the reality is that it has gone through periods where it just has not worked. It has either been uncompetitive price-wise, too slow to respond to underwriting opportunities or you just cannot cover the transaction because of content requirements. Private insurance gets by all those issues. We are fast, we do not care about content, and we can price with commercial reason. In my opinion, private insurers stand to win a lot of business.
Darko: From my perspective, it would be devastating if it is not reauthorised for our company and some of my colleagues, because we use the working capital programme, different insurance programmes and some medium-term here and there. While we have found some insurance companies that can wrap an LC transaction up to three years and so forth, the majority of our business and our growth has been based on US Exim, so it would affect us a great deal if it is not re authorised. Even though the cost has gone up on some of the country risk profiles, there
are still opportunities for clients to be able to utilise the programmes.