Swiss Re Corporate Solutions gathered trade finance bankers and insurers in Sydney to discuss the hot topics in the Australian market.
Roundtable participants:
Devpriya Misra, senior originator credit and surety, Swiss Re Corporate Solutions (chair)
Albert Lim, head credit and surety hub Asia Pacific, Swiss Re Corporate Solutions
Adam Cox, country manager, Australia & New Zealand, Swiss Re Corporate Solutions
Michael Lim, global head of structured trade finance, ANZ
Sean McGargill, head of insurance, Australia, ANZ
Jennifer Scott Gray, head of trade and supply chain finance sales, Westpac Institutional Bank
Andrew Speers, associate director, trade and supply chain, Westpac Institutional Bank
Adnan Ghani, head of trade, Commonwealth Bank of Australia
Cameron Perrett, executive director, financial institutions group, Commonwealth Bank of Australia
Kim Ly, head of trade asset management, National Australia Bank
Larissa Stanley, associate director, trade and working capital, National Australia Bank
Misra: We want to understand how Australian banks can be global leaders in trade finance. To begin, can one person from each bank share where they see themselves in the global scale. Do you think you are a top tier global trade bank or alternatively where do you see yourselves in the global order?
McGargill: ANZ has a pretty good regional footprint. We are in most parts of Asia, and we see Asia as a big growth corridor for the bank. We would rate ourselves fairly highly on that trade flow front, purely because we have the presence and the connectivity with a lot
of Aussie corporates that are doing trading business.
Do we have any weaknesses? I probably would not like to say that we do. We cover agriculture and mining, which is what Australia is pretty much known for. We cannot cover everything, but we like to think that we are reasonably well positioned.
M. Lim: I do not think it is necessarily about: ‘What are your weaknesses?’ I think competing effectively is really about knowing what your strengths are. As an Asia Pacific-focused organisation, we know that, for example, Sub-Saharan Africa, Eastern Europe and LatAm are not our strengths. We do know, however, we can bring significant value to our customers in Asia Pac, as well as our global clients in Europe and the Americas. It is really about focusing on your strengths as opposed to getting caught up on what you cannot do.
Ly: I can echo that. The focus for NAB has always been our clients. As the trend has been moving into Asia or relocating the operations, procurement and treasury, NAB has to be there. Where we need help and partnerships, we use the leverage from those global, international players and use the limit allocation or distribution ability from them to improve our reach in terms of appetite.
Stanley: Just to extend that, where Australian banks have really improved over the last few years is in connecting the dots of the supply chain for our customers. Even a couple of years ago, we were quite segmented, but we are getting better at working with our offshore hubs throughout Asia Pacific, and then also with our strategic partners. You are right. There are jurisdictions that we just cannot be in, because we cannot be there for everyone. We have those partnerships in place to support our customers.
Scott Gray: From a Westpac perspective, we always term ourselves as a relationship bank, and that determines our strategy around globalisation. If a relationship moves into a particular jurisdiction, that is where we tend to follow. We do not want to put ourselves in every jurisdiction, because it does not make any sense for us from our relationships that exist currently. That is a very big part about being who we are on a global scale.
Ghani: I have worked in European banks, US banks, and now an Australian bank. I will share my simple perspective. Australian banks have been blessed, in my view, because in Australia most banks actually ducked the global financial crisis (GFC). In my previous life, I lived the GFC, where survival was about cutting costs, managing your risk-weighted assets. For the four major banks, the ratings and the liquidity position are among the best in the market. The US, European and Asian banks are struggling with those GFC after effects. The Australian banks have not had the same severity of impact as some of the other banks.
I think technology is really going to be a key element in the future for us. We see that happening in other industries. The biggest hotel chain is no longer Hilton; it is Airbnb. For us, we should leverage what we have. We have an extremely strong rating and a strong balance sheet. We should understand that the trends are changing for the future and leverage those trends so we can take part in it.
Having a big network means a huge infrastructure cost. That is baggage, in my view. With regulatory capital being even more expensive, how do you justify a presence in so many markets? That is why you see the larger players now rethinking their strategy and pulling back. Australian banks are not saddled with those kinds of challenges. For us, it is really about how we leverage our strength today, leverage the trends and really get into a leadership position.
Misra: A consistent theme that I have heard at various conferences is that Australian banks like to follow their customers and their trade flows. While the banks have established sizeable country limits following their customers to China, India and Korea, the moment we look at more challenging frontier or emerging markets such as Vietnam, Bangladesh, Sri Lanka, etc, in Asia, we find that most Australian banks have limited or no limits in these markets. What are your thoughts on following your customers to these geographies?
Ghani: If you look at Australian trade flows, if two thirds of your flows are with one country – China – then obviously a lot of big Australian banks will have lines on China. One of the country’s challenges is how to diversify and open up other markets.
For banks, there are two particular challenges with your risk return also. When you look at some of the countries we categorise as high risk, including Bangladesh, Sri Lanka, Pakistan and Nigeria it is also a matter of risk return. As we have seen, the compliance authorities, both from a regulatory perspective and also within the banks, are becoming more and more stringent. The amount of due diligence required to open up limits in some of these markets would be extremely expensive. Getting it wrong could be even worse. Sometimes you just say: ‘We just do not have the bandwidth to cover all of these markets’, and focus your resources on the areas that do produce results.
Misra: Before we get others to comment, I want to challenge that a bit from three perspectives. The first perspective is that the ADB’s Trade Finance Programme into emerging markets, since approximately 2007, has been loss-free. Second, in the past 17 years, our team at Swiss Re Corporate Solutions has had a very good track record with our emerging market portfolio. Finally, at some point, when the ADB and IFC programmes reach their own risk limits, how would you support your customers growth in that situation?
Ly: I agree with that but resources are finite. One of the strategies we are using is partnering with some of those names that you mentioned, and our risk partners who have a natural competitive advantage in that area. It is always easier to go into a new market when you are sharing a risk and having somebody else with skin in the game. We are dipping our toes in and sharing the risk, and, at the same time, educating our own internal credit people and getting them slowly comfortable.
Speers: Westpac looks to support our customer flows as they trade with emerging markets. If I look at our major export customers, whether it be sending grain to Bangladesh, or sending cotton to another emerging region. We support those flows. We support the inputs to the emerging markets by funding the terms of trade. We might not necessarily call out that we are providing finance to an emerging market, but we are doing it through the corporate, and understanding their supply chains.
These arrangements are the natural space of structured trade. You might not be comfortable with the geographic or political risk your customers are taking, but you are comfortable with your customers, with the commodity, with the shippers and so on and we can build solutions in that space.
Misra: Michael, you have been at the forefront of starting structured trade finance in Australian banks, going into emerging markets and being very successful. Can you share how you went about that strategy and how the journey has been?
M. Lim: Structured trade was just mentioned there, and that is absolutely the way that we approach our business as well. At ANZ, we have the advantage of actually being on the ground as well. You mentioned Southeast Asia and South Asia. ANZ reopened in India about three years ago now, so that is a progressive growth strategy there. From a RWA perspective, it is really about responsible growth of the business, as opposed to trying to get exponential growth and taking on too much risk too quickly. You want to grow the business in a responsible and managed way.
We have just opened in Thailand. We are working on our opening in Myanmar. We have the largest network in Indochina of any international bank. We have the largest network in the Pacific as well. I think we have the advantage of being on the ground, and actually banking local businesses as well. When we are looking at structuring along the supply chain and mitigating risk – either through controlling the commodities or cashflow– the fact that we may bank the party on the other side just gives us more options around structuring. If ANZ has already made a material investment in that country, you can assume that we have country and political risk appetite.
Stanley: The other element of risk that has not been mentioned is the social responsibility element, and really understanding the supply chains throughout these countries. If you are not on the ground, you really need to partner with organisations that understand that risk in those jurisdictions as well.
Ly: When we pick our risk partners, we really need to understand their reach. Where they have a presence, often they see things first hand and can pick up the phone and tell us what their intel is. That helps us with the credit story as well, and helps us eventually, to get more exposure to be able to structure deals more appropriately, by getting that first hand intel.
Speers: I think one thing that will change this landscape greatly will be future Free Trade Agreements (FTAs). The Trans Pacific Partnership (TPP) is one such multilateral FTA currently being discussed. In addition the Australian government has been good in organising separate, bilateral trade conversations. Once these start to become more cemented in the Asia region, a lot of the risks related to some of those emerging jurisdictions will fall away.
Misra: In terms of product portfolios, some of the banks are now starting off with new areas. Adnan, I understand CBA is looking at developing beyond the standard supply chain, documentary or structured trade. What does that journey look like?
Ghani: I used to be part of the Global Trade Industry Council. This was the trade heads of all the various banks. The longest debate we had was on definitions of trade. All of the experts could not agree on what was the definition of ‘trade’, and everybody would use a different term for a similar product. If the trade specialists were confused, imagine what the state of confusion was outside of those specialists.
The industry therefore got together and said: ‘We are now going to define trade into three buckets.’ There was traditional trade, which is all of your documentary stuff. There was open account trade, which was supply chain finance. Anything else that we could not classify, we put in under structured trade.
That is the industry definition, by and large, and we are doing the same thing. Our first journey was to make sure that we had our traditional trade products suite complete. We then built our open account trade, and now we are building our structured trade.
For us, the big challenge really is bringing all the key stakeholders along that same journey, which means explaining what each trade product solution is, how it is different from working capital and generic loan, and why you should treat it differently. They have really been the challenges that we have faced.
M. Lim: I agree with you. It is a journey. It is about corporate experience, and you do not build that overnight. It takes time. I think, going back 10 years, Australian banks have traditionally been corporate lenders, project financiers and really strong in the bond market. I think that is partly because, here in Australia, we are at the beginning of the supply chain. If you look at banks in Singapore and in Asia, they are right, smack bang in the middle of that supply chain. With the velocity of trade flowing through those economies, they are forced to understand. Your average relationship manager and your average transaction banking salesperson have to understand trade, because it is the bread and butter of the economy.
As Aussie banks, including ANZ, have expanded into Asia and developing markets, trade has been at the forefront of that strategy. This is firstly because it is about leveraging off the trade flows through your relationship customers, and the investment coming back in to Australia, but it is also about managing risk for the business. The more you move into those emerging markets, the more you have to understand that controlling the cashflows, underlying commodities and flows is the best way of managing your risk. I guess it is like an oil tanker: it takes time for it to turn, but once it starts moving it is a bit unstoppable.
Perrett: You have touched a good point, but there is also a client relationship mindset piece overall. Australian banks are corporate relationship-driven. That product journey that Adnan mentioned for us really started as an FI trade strategy, when we got back into the market. That is now very well understood. Our correspondent banking team and all those guys are very well across the wall as to partnering with our banking peers around the globe. That is similarly emerging on the insurance side.
It has taken a while for our relationship managers in the more open account stuff and actual corporate client relationships to get comfortable showing CBA as an alternative provider to our domestic and global peers. It becomes even more complex when you get into the structured trade side and you have to say: ‘If I am doing an oil receivables trade in Singapore with Macquarie Bank, am I doing that through my Macquarie Bank relationship or my BP relationship?’ The bit that is very hard to get everyone over the line is as to which part of the relationship chain we are trying to support.
Ly: I think we are all talking about the same thing in terms of innovation. The innovation is to focus on the customer. What happens is, the more we focus on customer the more we understand the issues or problems. All we are trying to do is plug those problems. Of course, you have to think outside of the box.
You cannot always give them one standard product. You would not be a trusted advisor; that is not going to solve our problem. The more we try to plug those holes efficiently, the more structured we have to be.
Scott Gray: To your point, Kim, it is about that education. It is client education, both internal and external, and that actually helps the innovation of the industry as a whole thrive. If you get one weak link that does not understand it, they are much happier to implement an overdraft than anything that is structured and has a lot of bells, whistles and complications. It is a big job for all of us to continue that education.
Stanley: From a client’s perspective as well, you talk about bankers not having the awareness. You could almost say that the Australian market currently does not have the awareness of all the solutions that trade and structured trade can offer, especially given there has been so much liquidity in the market over the last few years, there has not really been the impetus to structure transactions.
Misra: That brings us to a very interesting point about following the customers and solving customer problems. Last year, NAB and CBA were struggling with a case of freeing up a top-tier customer limit, the specific case being Woolworths which is public information. Woolworths had approached its bank clients to find a solution to diversify or increase its available limits. As a bank, you have finite customer limits available and you wish to allocate them towards more attractive business from a remuneration perspective, such as hedges rather than for vanilla bonding instruments like workers comp cover. As there are only finite limits available within the banking market in Australia, NAB and CBA solved the issue in a new way. Do you want to talk a little more about it?
Perrett: We have just closed our fifth transaction in the same vein, and I guess we are probably placing a more serious emphasis on build-out of that product than some of our peers. Corporates in Australia do have large balance sheet needs. Out of the five transactions we have done, most of the time we are freeing up limits to other majors’, more so than CBA’s limits, potentially.
I guess we view it from the point of view that there is very little opportunity cost for me, as someone running global insurance exposures, to take exposure on an insurer versus an exposure on a Woolworths, an Origin or something else. My starting point exposure with some of these global sureties might be near zero, but they are a double A-rated organisations and I have probably got a billion or more capacity. In my mind, it is just a way of getting the opportunity costs right for the organisation as well.
Distributing away from our corporate exposures into the FI space, to free up limits to do more interesting things with our corporate clients seemed beneficial to everyone, and I guess that is probably where we have got more broad sponsorship across the organisation to grow that book.
The key reason why Woolworths were the first to do that trade was to get their powder dry with the majors and to find an alternative funding distribution source. In all the trades that have been done in Europe, the corporate did not know that those two things were occurring for them. I think the transparency that corporate treasurers now have, that this is a solution they can use to free up lines and access new pools of capital liquidity, is the thing driving the opportunity, which we think is a good thing for the overall Australian market.
Scott Gray: Woolworths is a really interesting example, though, because, as you get bigger conglomerates – such as Woolworths or Wesfarmers – and as those mergers and acquisitions get bigger, your limits get blended. Hence, from a bank perspective, you do have that requirement to say: ‘How do I do risk transfer? I have to free this up, because we have multiple things that we need to do with those limits and with that now one client.’ From an insurance perspective, it will become an increasingly more popular way of actually moving some of that risk and freeing up lines.
Perrett: The Woolworths treasury team have been back in front of those insurers twice since the deal was done, in a 12-month period, giving updates on financial performance and other things. They just view them as equivalent to their banking group now, and the way they manage them from an investor relations perspective is very much of that ilk. All of those things are immensely positive for the way that our corporate clients view the risk.
I think we also will start to see more and more of it, as people start to get into the capital side of Basel III and all those types of things. From our perspective, the risk is priced much more appropriately when you partner with an insurer, because an insurer is genuinely still able to price on an expected loss basis, and so the capital held is far more commensurate to the likelihood of a draw.
Misra: While there are merits in being transparent with your customer about having an insurer in the risk equation, there are limits to the application. For example, if you have a letter of credit and you are running limits on Bank of China and the LC needs to be issued in the next 24 hours, it may not be a practicable solution. In my view, this is where having silent risk participation agreements and bilateral insurance agreements as an additional risk distribution tool is very helpful to achieve the goal of supporting your client base. Sean, you might want to share how you look at insurance – you wear the insurance hat – and how you use it as strategy.
McGargill: All the banks will be in the same boat. If you go back a number of years, if we did syndications, we would only ever think of inviting other banks. Insurers and banks are being regulated by the same regulator, so they are going to come closer together. It therefore makes natural sense that, instead of just thinking of another bank to risk participate with or do a syndication with, you look at the raft of insurers that are out there. At this stage of the cycle, the good news is they do have a lot of appetite and the pricing is good, certainly in our eyes.
A. Lim: From an insurance perspective, it is certainly gratifying to know that the banks are embracing insurance. Kim mentioned insurance being a non-competitor to the bank market. At the same time, we are a silent participant behind. We leave it to the bank to maintain the relationship with the client.
The other good point is that insurance is so highly uncorrelated with the banking sector. If things go wrong, for example like the GFC, and all your bank balance capacity dries up, the insurers are still there. We all know that, with the challenging trade finance market, diversification is
key for us. While we have been in a very big surety play ourselves, working with a bank is a bit different. There are different considerations. We call it a surety for banks approach. In this respect, in terms of banks working with insurance on the surety side, we observed that the Australian banks are probably at the forefront compared to other banks.
I think the Australian banks should play to their strengths, and, to me, it is a good, natural fit for us.
Misra: The one topic I want to take up before we close is RWA and regulation. We have discussed how we can go about solving customer problems to support more trade into emerging/frontier markets by either expanding the bank’s risk appetite and capital base or using alternative distribution channels. In any of those equations RWA is a key concern. Can you share the thought process in each bank on this area? Where do you see the biggest hurdles with the Australian Prudential Regulation Authority (APRA) compared to Basel in using alternative distribution channels such as insurance to reduce RWAs?
Perrett: Everyone has their own challenge with the internal interpretation of what APRA is saying, as much as what APRA has actually written down and said as well.
We have seen multiple examples over the course of the last couple of years where one Aussie bank will treat something totally differently to another Aussie bank. There is a big enough challenge internally, getting a uniform view of how everyone interprets the APRA rules versus everyone who is trying to drive that. When you look across the trade spectrum, there is a concern about having enough specialist knowledge and sophistication in our regulatory capital policy and credit risk policy teams to understand the nuances between some of the products that are on offer.
Many people will look at it purely through the fact that they have only ever had to look at cash-based lending products, so giving appropriate relief and benefit for certain structures is very difficult to get through the internal policy teams. While we have one of the most conservative regulators in the world, every one of the majors has another element of conservatism in their policy teams, which makes it even more difficult.
Scott Gray: It comes back to the education piece again. There is the client education piece; there is the internal policy education piece; and then you have the regulator on top of that. Often, when policy is written, they have consulted widely, but, when you get down to the nuances of particular structures, that is when it becomes imperative to open up that dialogue again.
Ghani: This is an important topic across the industry. The area where it touches insurance very specifically is Basel III and now APS 113. While they have been very clear about guarantees, and have specified that, if guarantees meet these five conditions, there is a probability of default transfer. The guidelines for insurance policies have not been defined in the same way as guarantees. That means it is left to the interpretation of banks and regulators in terms of how to treat it – either a probability of default (PD) transfer or a Loss Given Default uplift. Some banks are saying: ‘If we get a Swiss Re policy with the five conditions met, this is like a guarantee and we will treat it as a PD transfer.’ Others are struggling to convince their stakeholders that it will be treated as such. That is on the insurance side.
Misra: With that, we bring the discussion to a close. Thank you very much.
