Adopting an Asian-focused growth strategy is fast becoming an all too familiar ploy among global trade finance banks. Ted Kim speaks to some of those setting the trend.
The robust interest among global banks in expanding their Asia Pacific trade finance operations is not at all surprising. Some 40% of the entire global trade finance market is related to the Asia Pacific region, making it more important than North America or even the European Union. Intra-Asian trade in particular is widely seen as one of the hottest growth markets for the next decade. Already, well over half of all trade finance-related communications over the global Swift bank payment network are reported to be related to some aspect of trade between ASEAN markets.
“The Asian economies have been relatively well insulated from what has been happening in the rest of the world. Most of the governments in the region have also introduced stimulus programmes to spur domestic demand,” observes Vivek Gupta, head of trade and supply chain, Asia Pacific for ANZ, based in Hong Kong.
“For the next year, I think Asian trade flows will continue to remain strong. We have huge trade flows, for instance, between China, India, Australia and New Zealand, and also within Asia. Bottom line: trade finance is the life blood for all of Asia.”
No doubt, a global multibillion dollar spending binge by central governments desperate to resurrect a collapsing economy has pumped Asia Pacific trade to record levels. According to Alan Goodyear, head of global transaction services for Asia Pacific at RBS: “The reality is that globally there has been a great deal of fiscal stimulus that has resurrected life into the economy.
“The markets that have benefited the most have been China and India and neither of these two countries has gone into recession. That has not only benefitted the domestic trade within those countries, but it has also benefited trade going into China and India.”
On top of macroeconomic drivers, volume for global transaction services at RBS is also starting to see tangible top line benefits from the ongoing integration with ABN Amro.
“We have barely begun to see all the potential revenue growth from and flow of new business from our UK and US clients as a result of the ABN Amro synergy. From the transaction services point of view, the ABN Amro acquisition has provided a fantastic synergy,” Goodyear notes.
“For 2009, the entire GTS business was up 25% and trade finance alone was up by 55%. We expect to double our Asia Pacific business by 2013. In general, the GTS business of RBS had a pretty outstanding year globally.”
Role of technology
Like many large players in the region, RBS is betting heavily that a globally integrated platform that brings together several different services into one system will be the way forward.
Large end-users of transactions services will increasingly demand complex risk management in terms of dealing with volatile interest rates and currency as well as liquidity management on top of cash management and credit analysis. While local banks may be able to compete in certain customised areas – such as counterparty credit – it is expected that more and more trade finance business will move towards the fully integrated global institutions.
“Clearly, there is an ongoing migration from open account trade to letters of credit-based trade. But in addition to trade and cash management, RBS will also develop structures that enable clients to deal with illiquid and cash-trapped situations. That is, cash deposits in the wrong country or work currency.
“This could be best optimised instead through centralised pooling and allocation towards internal operational uses. Local banks have certainly improved the quality of their trade finance and cash management capabilities, but their services are primarily domestic. In terms of servicing complex cross-border flows, large players will have an advantage,” Goodyear explains.
“Thus, the key is integration: trade finance, supply chain finance, risk management and cash management.” In terms of managing liquidity, Goodyear points out that over the last year, RBS had placed some US$5bn in trade paper on behalf of clients – a considerable sum of money that can now be used as operating cashflow, rather than remaining illiquid. Given the tight capital markets’ lending environment in 2009, this type of liquidity management has been another key to winning business.
In the technology area, RBS is continuing to expand its Access On Line global cash management system, as well as MaxTrad. The MaxTrad system for trade financing enables end-users to monitor all phases of the trade finance process and even provides complete imaging capability for all documentation. This imaging capability is particularly useful in the event of a discrepancy. All parties involved in any given transaction can view the identical image and thus resolve any issue far more efficiently.
RBS plans to continue to invest heavily in training both internal staff as well as clients’ staff in the use of MaxTrad as well as the technicalities on UCP 600 – the set of governing regulations for international trade activities. For UCP 600 alone, RBS conducted some 14,000 hours of training seminars in 2009.
Clearly leading the uptick in Asia Pacific trade flows is the giant Chinese manufacturing engine. “You cannot ignore Chinese macroeconomic trends. Where China goes and its export machine, so goes the rest of Asia Pacific trade,” says Scott Stevenson, manager of the global trade finance programme at the World Bank’s IFC in Washington DC.
In fact, proximity to mainland China is one of the key reasons behind HSBC relocating its corporate headquarters from London to Hong Kong in early 2009.
However, like those of many Asian markets, exports from China fell by nearly half at the beginning of 2009 because of the global economic slowdown. Large market players noticed a substantial curtailment of credit by large Chinese banks to their SME clients.
This fall in exports and contraction of liquidity made the entire issue of counterparty credit management more essential than ever.
According to Pravin Advani, head of trade for Asia at RBS, estimates suggest that between 20,000 and 30,000 SMEs went out of business in southern China during the peak of the global slowdown. That pattern, if not the magnitude, was repeated right across Asia.
Yet, today, exports are down only 20% from their peak from more than a year ago primarily resulting from a surge in sales to South America and the Middle East. Part of the speed behind China’s fast rebound in export sales may be the tight control the Chinese Central Bank keeps on the currency markets. By keeping China’s currency, the renminbi, tightly pegged to the falling dollar, Beijing had made Chinese exports increasingly competitive around the world.
The Chinese government has put in place a variety of policies designed to bolster export revenues, such as tax breaks and currency market intervention. These measures have certainly relieved unemployment in China and helped the nation weather the crisis. More importantly, Beijing has been on a buy-China shopping spree over the last year, spending heavily on domestic infrastructure investment projects. In fact, central government spending in the face of the global economic downturn has been so aggressive, that the past fall off in exports merely dampened the economy’s continued robust rate of expansion. China’s economic growth accelerated to 7.9% for the first half of 2009, up slightly from 6.1% in the first quarter, as domestic investment driven by government stimulus offset falling exports to Europe and the US.
Unfortunately for European exporters looking to the rebounding Asia Pacific markets, they are still hindered by a rising Euro that is pricing European goods out of the market. While Asia Pacific consumers are slowly but surely regaining their vociferous appetite to buy, they are nonetheless turning away from costly European imports and focusing more on cheap dollar-based US imports.
Most bankers in the trade finance business are optimistic about the potential of 2010 for the Asia Pacific markets, although there is a definite degree of caution about other potential hidden bubbles waiting to pop.
The restructuring of debt issued by Dubai World proved yet again for banks in the region that there are downside risks to any rapidly growing emerging market. Again, robust risk management and globally integrated platforms should prove to be the winning combination.
“Although globalisation may have suffered a setback over the past 18 months, there is no sign that the long-term trend will abate. Buyers and suppliers need to look for trade finance solutions from banks which combine local knowledge with global reach,” says Advani at RBS.
“This does not mean, however, that large banks are operating in isolation. Far from it: banks such as RBS work with a range of partners – from trade insurers to local banks and governments agencies – to share risk and leverage credit. By doing so we are able to find solutions and build opportunity for our clients.”
In general, most trade finance bankers in the regions are optimistic. “Clearly, trade finance and supply chain finance will be the core strategy for ANZ in Asia Pacific. With the acquisition of the commercial businesses of RBS, we will be able to acquire more customers in several different countries,” Gupta explains.
After closing the transaction last year of purchasing a variety of RBS assets, ANZ is continuing the ongoing integration process of the middle market commercial banking of RBS, the entire institutional business in Taiwan as well as the wealth management and retail business in several different Asia Pacific countries. “We are investing in more people and more systems to enable us to be quicker and more nimble than our competitors,” Gupta adds.