Hamburg is Europe’s second-biggest port, but not even Germany’s trade surplus can shake off concerns over global trade and finance. Sofia Lotto Persio reports from the GTR Europe Trade and Export Finance conference.
Germany is undoubtedly Europe’s exporting powerhouse. The country’s current account has been in surplus for the past eight years, and it is expected to hit 8.5% of GDP this year. The German export credit agency, Euler Hermes, is often praised for its steady support of exporters and lauded as a role model for other agencies.
German banks may be cautiously reconsidering and restructuring their budgets, but still sit on comfortable liquidity piles. And yet Germany’s trade surplus has attracted much criticism, as it is considerably above the 6% threshold recommended in EU budget rules. In March, it hit almost €30bn, its highest monthly recording to date. European Central Bank president Mario Draghi has repeatedly criticised Germany’s trade surplus, hinting that it was the cause of the bank’s low interest rate policy, which has been condemned by Germany. The International Monetary Fund (IMF) has been critical of the country’s dominant trade position with the rest of the world, suggesting that Germany should use its surplus to fund infrastructure rather than racking up bumper savings.
In analysing the German situation in May, the IMF observed that German banks are struggling to address lower profitability. According to the organisation, low profits reflect “persistent crisis legacy issues, provisions for compliance violations, the need to adjust business models to the post-crisis regulatory environment and technological change, as well as long-standing structural inefficiencies”.
To complete this picture, the IMF also noted the decline in banks’ correspondent relationships with a number of countries, and encouraged German banks to better manage the risks around these activities, collaborating among themselves and with government bodies to harmonise the regulatory framework and facilitate information sharing on customer due diligence.
Can banks still do it?
Considering the global situation, it is not surprising that events like the GTR Europe Trade and Export Finance conference dedicate discussions to whether banks are still able to finance trade, and what challenges they encounter.
Regulations and compliance are still widely recognised as a burden, but one that is necessary to carry and to face. Holger Caspar, Germany’s executive director for global trade finance at BBVA, was confident that these would complicate, but not stop, projects from happening: “Good projects will be realised, they may be delayed by risk and regulation, but they will happen,” he said.
Other bankers echoed this pragmatic approach: “[These are] challenges that will not go away,” said Werner Schmidt, Deutsche Bank head of structured trade and export finance Germany, speaking at the conference. According to him, this situation necessitates a revision of banks’ business models and an increase
in collaboration across the industry.
Indeed, such times call for “co-ompetition,” as Mauro Bonacina, global trade market manager at BNY Mellon, called the collaboration with the competitor. “No bank can afford the wait-and-see attitude,” he said.
Still, bankers are adamant that non-bank lenders, whether these are alternative financiers or fintech start-ups, do not have the capacity or necessary risk appetite to structure complex transactions. “Trade finance is an area core to the bank, with high entry barriers, and in the future it will play a bigger role still,” said Jochen Hörth, finance director at C&F Steel International, adding: “There is enough liquidity in the market for corporates to do business and the risk is okay, except in certain areas, like Egypt.”
The low – or even negative, in the case of Japan – interest rates that are predominant in the developed world, are another problem for banks. While central banks think that keeping interest rates down will encourage lending and keep debt levels under control, banks feel that low rates hinder their profit-making abilities.
Michael Hogan, general manager and regional head of transaction banking sales for the Emea region at Japanese bank MUFG, evocatively recalled one of the first things he was told when starting out his career in banking, which was to follow the “3-6-3” rule, which he explained stands for paying 3% on deposit, lending at 6% and hitting the golf course by 3pm.
His anecdote highlighted interest rates’ core importance in banks’ profit model, but, as Hogan put it, now that the world has changed, they need to find ways to adapt to it rather than simply being awash with liquidity that “is not going to the right places”.
In fact, when the audience was asked about the funding available for smaller corporates, the answers did not paint a positive picture. Over 50% of the corporates in the audience said they have had to abandon a project for lack of financing, and 41% named as their top concerns both insufficient risk appetite from banks and availability of liquidity and funding.
Providing finance to those neglected by the banks is an area where fintech propositions can add value. According to Chris Hyde, chief financial officer at Mitigram, fintech companies have become a necessary part of the financial spectrum, providing the financing support smaller players need. “There is a lot of attention to the higher end of the market, but there is a whole section underneath that that is neglected. It is about time financiers looked far wider and beyond the 10% of the market in which they can earn higher margins,” he said.
According to Igor Zax, managing director at Tenzor, a corporate restructuring and working capital management consultancy, banks can provide the knowledge and experience alternative financiers need, but they no longer hold exclusivity over the best services or the best people, and fintech has become part of that equation. “It is a big democratisation of the market, the ability to buy individual parts of the deal. It creates value for corporates,” he said.
In terms of opportunities for Germany and Europe, Asia is still the most attractive market. This is, at least, according to panellists discussing macro-economic challenges in global trade, who managed to convince the majority of the audience mostly interested in Africa to get excited about countries in the Asia Pacific region, such as Sri Lanka, India, Bangladesh, Vietnam and the Philippines.
Faruq Muhammad, head of structured export finance for the Emea region at Standard Chartered, highlighted opportunities in Pakistan – where high credit risk has traditionally been a deterrent. The country is benefiting hugely from the One Belt One Road initiative, and there are a lot of infrastructure and energy projects fuelled by China.
“The challenge with Pakistan is that the wider community does not understand it very well,” he said. According to him, the people writing risk premiums do not know the reality on the ground and instead rely on international news to make the assessment. “The ones who understand the place price the risk right,” he added, professing confidence that once the payback starts, the risk pricing will decrease.
Myanmar also won a mention in the discussion on the countries to watch in Asia Pacific, with Peter Sargent, formerly at ANZ and now director at Australian Business, pointing out that Chinese and Japanese corporates are already there – though only Asia Pacific banks have been awarded a banking licence in the country, which remains a challenging process. Sargent was adamant in reassuring the audience over the slowdown in China, where good opportunities exist in the infrastructure space in particular.
However, not everyone shared Sargent’s optimism. “China is worse than it looks,” said Manuel Probst, head of export finance at Ferrostaal Equipment Solutions, pointing to the number of factories north of Beijing that aren’t running a profit, but keep producing and stocking the warehouses. Even German chancellor Angela Merkel recently complained about China’s overproduction of steel, which is causing headaches in European steel-producing countries like Germany and the UK. “China is a very difficult market right now,” Probst added. “We go to some markets, in Sub-Saharan Africa, and nobody wants Chinese equipment.” In fact, according to him, south-south trade solutions through China are not particularly in demand.
As access to foreign currencies such as US dollars remains challenging in Sub-Saharan Africa, Probst also talked about the “unprecedented” difficulties his business is facing in some countries in the region, such as Ghana and Angola. “There are LCs that are not being paid and even on the ECA side there are a number of transactions that aren’t happening,” he said. “We cut down our business dramatically.”
The one market that everyone seems excited about is Iran, although the consensus is that trading with the country remains challenging. “The German government is not pushing banks to enter into the Iran market again,” said BBVA’s Caspar.
The situation is similar all over Europe. “Very specialised Iranian banks in Europe are up and running: very regional banks that are doing selective activities and that is pretty much it. All the major, more internationally-oriented banks are not there yet. The potential is there, but most banks have not started, not even on a selective basis,” said Alf Soerensen, general manager for Germany and head of trade finance for the Levant at Bank ABC.
Besides the obvious compliance requirements, another major bottleneck is caused by international clearing banks, which are effectively regulating access to US dollars for those who want to trade with Iran.
As such, any business considering trade with Iran needs to submit a written proposal and needs to be re-analysed by clearing banks in terms of their overall risk, and may be cut off completely from the clearing infrastructure. Delegates agreed that only political pressure can sway these banks to open up to Iran, but while this is slowly brewing in Europe, in the US the situation is likely to remain uncertain, at least until November’s presidential elections.
Watch the video report from the conference here.