GTR and the International Trade and Forfaiting Association (ITFA) Young Professionals network hosted a roundtable in Poland in September to discuss the current risk environment, innovations in technology and the needs of young professionals in the marketplace.
- Jakub Borowiec, trade finance manager, Bank BGZ BNP Paribas
- Asif Dad, assistant vice-president, trade finance syndications, Barclays
- Chris Hall, head of trade asset management, Lloyds Banking Group (chair)
- Jakub Kopinski, senior trade finance specialist, mBank
- Grzegorz Pojnar, trade finance manager, ING Bank Slaski
- Oleh Turchyn, trade finance manager, Bank Zachodni WBK
- Marc Wilmink, manager, trade finance risk distribution, Rabobank
Hall: We’re going to start off talking about trade finance in Europe. At the moment, we have slow growth: the European Union’s GDP grew by only 1.9% last year and just 0.3% in Q2 of this year. We have questions over free trade agreements; we have increasing doubts over the future shape of the EU; and the global market is entering into a period of uncharted territory. We can see this reflected in the H1 2016 trade finance revenues of the 12 largest global corporate and investment banks, which dropped by 9% this year.
With that, and with the growing instability in Europe, be it financial, such as in Greece; social, such as the migrant crisis that we find affecting the south of Europe; or political, such as Brexit and the pan-European rise of far-right politics; what does this mean for the future of the risk landscape for our business?
Wilmink: There is more political uncertainty in the market, which would imply higher pricing. However, with the low interest rate environment, less growth and fewer assets around, and all market participants still hungry for assets, this has actually resulted in lower pricing. Clients are in the driving seat and clearly we are working in a buyers’ market.
Hall: So you think that the rewards versus the risks you have to take are imbalanced?
Pojnar: When it comes to plain vanilla products in trade finance, I’m not sure if they are in danger because when the risk is higher our products become more popular, because all the counterparties want to secure themselves.
Borowiec: We do get compliance problems with countries vital for Polish exports, such as Poland’s neighbours: Ukraine, Belarus and Russia. A substantial part of the exports, in large part agricultural products – apples or meat – went to Russia before the sanctions. However, we do see Polish companies reacting very well and profiting by shifting their attention to Africa or South America. So Polish exports may grow by some 10% in 2016. We are also hoping to start doing business with countries such as Iran and Cuba soon, where Polish producers of agricultural and mining machinery or food see enormous opportunities.
Turchyn: Higher risk is a good thing for trade finance in some respects. Recently we have seen a lot more large supply chain finance programmes implemented in Poland than in the years of stability, for example, up to the crisis of 2011. So as the risk environment is worsening, some specific trade finance products are doing better and better.
Wilmink: I would say to some extent that is correct and I do agree that if there’s more risk it might benefit the trade finance business because it needs more underlying documents. However, the main problem is that overall trade volumes are down, so it is more to do with supply and demand. With less business around, people are probably willing to take on a little bit more risk.
Turchyn: From the asset management perspective, it is true, I totally agree. But from our perspective, talking to the client, selling export finance and plain vanilla trade finance, we see that they are more and more interested in, for example, supply chain finance.
These are very well-developed and well-known products in the UK, for example, but in Poland they are only beginning to develop. We should be going after our customers and supporting them with these types of solutions. So I do think there are a lot of opportunities with this.
Dad: Most certainly, there are a number of markets where there is an imbalance between risk and reward. Trade margins are generally stable, even in times of uncertainty, and for that reason I don’t envision this imbalance being corrected in the short term.
The recent events in Turkey are a great example; the attempted coup has had an immaterial impact on the margins within trade, whereas if you were to cast your eyes over to the bond market and credit default swaps (CDS) this would paint a completely different picture – margins and yields have adjusted according to market sentiment.
Hall: So you might bring in innovative structures, and whilst they might be structures that are used elsewhere, they are relatively new into the Polish market?
Turchyn: Yes. For example, the financing of suppliers in Asia. In the UK, it is probably a very common thing and something that everybody does, but in Poland, not that many banks do it. There are huge retailers and huge companies which buy from China, Hong Kong, India, and we see that there is interest from our customers in these types of solutions.
Hall: Banks are reducing their correspondent banking networks, and yet clients are exporting to ever more varied places. What else are your clients asking for, and more importantly, how is your organisation changing and evolving to meet their needs?
Wilmink: In the environment where I work we see our clients mainly pushing for lower pricing as a consequence of the ample liquidity in the market and eagerness for assets. Clients have plenty of financial institutions to tap into and can find lower pricing. In terms of diversification we don’t really see very exotic or new types of business as a consequence of recent developments as yet.
Dad: In the UK market, we have seen a fall in demand for traditional trade finance products such as letters of credit. Clients instead prefer to conduct business via open account. As a consequence, we’ve seen an increase in activity for receivables finance and supplier finance. Clients are more than ever focused on balance sheet management and ensuring that they are supporting their suppliers.
Pojnar: Coming back to the pricing, if we cannot do anything to make pricing higher, we need to take a closer look at the cost side again, and we have to do everything to cut costs. I see in my bank that we have a strong focus on the digitalisation of the process, getting everything that can be done without a human done by a computer.
Hall: Absolutely. We had a session earlier today at the ITFA conference on technological innovation and how you can get intermediation of electronic bills of lading, and how it can speed up delivery for clients. I guess my question to you would be: is this something that you are all embracing? And is it something you are seeing client demand for both in Poland and the other areas you are in?
Wilmink: If you look at the trade finance market, I still think it is at the very beginning of digitalisation. If you look at the documents that go back and forward and the amount of stamps that have to be put on and the signatures on couriers and bills of lading, I think there is still quite a fair amount of work to do to make this more efficient and save time.
Borowiec: In the Polish market, the beneficiary can actually receive a guarantee signed with an electronic signature via email. In this way the whole transaction is done electronically. When it comes to LCs, Polish banks have also started thinking about the bank payment obligation (BPO).
Pojnar: What is typical for the Polish market in terms of the electronic banking system is that the banks are building those solutions on their own. Okay, the main banks are co-operating with key suppliers of software solutions, but we don’t have a third-party platform where all the banks can log in and sell it to the customer. We have separate solutions.
Hall: Do you think we as an industry should try to harmonise solutions, rather than each bank having its own in-house solution?
Kopinski: Especially when it comes to presenting documents in the EU. There should be a common standard. With Germany in particular we have some problems because we need to show the Germans all the original documents, but we are more digitalised than Germany, so sometimes the process is prolonged because of the need for originals in Germany. If the system could be standardised for the whole of Europe, for example, and if we are able to present documents which are authorised to our colleagues in other countries, it will be much easier and faster to co-operate.
Hall: So, there is an issue where you have products which are, in some cases, centuries old and then you’ve got a modern need to update how the client experiences that. And that’s a gap to fill. We are aware that the first blockchain transaction recently closed. How well do we think that could translate itself into a sustainable line of business for everyone?
Dad: I’m really proud that Barclays has been able to execute the first trade finance transaction using blockchain to manage documentation. The feedback we’ve had from the clients involved has been incredibly positive, and this success will hopefully have a domino effect with many more transactions to come and may change the way trade will be conducted going forward. Technology like blockchain needs to be adopted by us all if we’re going to make long-lasting change and provide clients the instant gratification that they yearn. Blockchain is one of many different current workstreams in the market. I’m sure it is only a matter of time until the next big innovative idea is shared with us.
Hall: It’s a question of whether banks are innovating because they think they have to, or if they are innovating because their clients are asking them to. And that for me is the point where as long as it is relevant to the clients, it
will have a much greater chance of being successful. What do you think?
Wilmink: I also think that in addition to that, the trade finance world is a global business and also includes less-developed institutions, and for them it might be even more difficult to pick up with these new technologies. You will still need the older technologies anyway to keep on doing business with the less-developed institutions. It will take quite some time for the whole industry standard to change because of the different levels of development of different continents’ banks and institutions. I think that’s also one of the reasons why it is already taking so long for trade finance to become digitalised.
Hall: ITFA established a young professionals’ network last year to help bring people together, provide mentoring, networking opportunities and give like-minded people a chance to get together and discuss trade finance. What development do you as young professionals in your marketplace need and want, and how can networks like the ITFA young professionals’ network help you with that?
Wilmink: Having senior people helping you establish your network is one of the key things in this market, especially because it’s not digitalised and it’s still a people business. Having a good network and knowing your way around the market is crucial and that’s where the more senior people can help the new people in the market. The senior people can transfer their expertise and their network to the younger professionals.
Dad: Within the Polish trade industry, are there many young professionals? Also, what development opportunities do you have?
Borowiec: Banks and the people working in them are relatively young because the whole commercial banking industry was born in the 1990s with the introduction of the market economy. So most of our senior colleagues are in their 40s. We have got quite a young staff and an energetic environment of shared knowledge. Banks are still able to pick the best talents, especially considering the fact that some 40% of young Poles have a degree nowadays.
Pojnar: We don’t have a problem when it comes to getting new, young staff, because trade finance is something interesting for them. Trade finance is not something typical, it is related to foreign markets, so young professionals want to work in trade finance here.
Wilmink: I think elsewhere banks are struggling to get young people in general, because banking is less popular than it used to be. Today if people want to be in the financial sector they prefer the more fintech-type of companies. Certainly in countries like the Netherlands and the UK, there is actually a problem in terms of getting new people into trade finance and banks overall.
Turchyn: Relatively young people here in Poland are very experienced, with 10 years of experience for a 35-year-old professional. It was only 20 years ago that the trade finance business in Poland was built up from scratch basically, and all the expertise in trade finance, supply chain and export finance came from other countries – the countries who brought banks here. All of us work for Polish banks with foreign capital, so that is where we get all the experience.
Pojnar: We have many fields that can be explored – such as export finance: so we definitely need knowledge to build it up here.
Turchyn: It’s not only the banks; our customers also employ young professionals, so it is maybe a little bit easier to communicate because we have a lot of customers which are huge corporates and when the customer’s representative is your age, it helps. This is how it is done in Poland.