The new UK government is keen to see the revival of the country’s industry through the promotion of exports. The banks claim they are on hand to support such initiatives, writes Kevin Godier.
“During the recessionary period, export volumes declined, but we are seeing an upturn again,” says Adnan Ghani, head of trade finance within RBS’s global transaction services team. World Trade Organisation (WTO) figures have indicated a significant rise in global trade in the first quarter, and data from Swift and other global providers suggest a 12-13% rise in trade volumes across 2010. In a scenario where domestic demand is falling, UK companies are being encouraged to expand abroad.
Statistics show that companies are 12% more likely to survive if they expand overseas, says Stuart Nivison, head of trade and supply chain, Europe, at HSBC.
“You can batten down the hatches, but exporting provides an opportunity to survive these unprecedented times, and emerging markets are the escape route,” he underlines.
With regard to potential export destinations, recent Trade Confidence Index research by HSBC showed that 30% of surveyed UK companies saw Asia as the most “promising” region for trade in the coming six months, says Nivison. “I expect this trend will continue in the coming years as the emerging markets move from being seen as manufacturers to being consumers in their own right. The biggest two opportunities are obviously India and China – the latter has a US$586bn fiscal stimulus package in place, covering roads, railways and hospitals, all of which will need imports. Asian fiscal stimulus packages worth a total US$750bn were announced last year.”
A recent customer survey by Lloyds TSB showed that the “bulk of UK exports still go to Europe and the US, but that trade finance extended by the bank focuses on the Asia Pacific region, especially China, and the Middle East”, observes Michael Gilham, director, international finance solutions.
“We are expanding business as customers begin to revisit the opportunities that trade provides,” he says, adding that Lloyds TSB is a supporter of the government’s ambition to rebalance the economy.
Similarly, Ghani says that RBS is seeing faster growth in certain emerging markets in the Far East and Middle East, where it has a strong presence, as well as some growth in CIS markets.
Risk appetite
Of course exporting brings risks, which is where banks can play their greatest role, argues Iain MacDonald, head of trade product, Barclays Corporate. “We’ve seen a greater focus on managing counterparty and country risk both with emerging and developed markets, post-financial crisis. As a result, classic trade finance solutions which provide country and counterparty risk mitigation are back in demand.”
MacDonald continues: “One of the most traditional methods is export letter of credit (LC) confirmations, where Barclays provides a risk transfer for the UK exporter on the country and overseas financial institution (FI). Demand for these products is increasing and banks have to be able to provide the necessary risk appetite themselves or find increasingly innovative risk distribution channels to increase the amount of business which can be handled.”
Fears on payment and payment security were shown by the Lloyds TSB survey to be a “fundamental concern among potential exporters”, says Gilham.
Nivison’s view is that the banks can help. He tells GTR that in terms of bank lines, the amount of trade finance the bank provided last year was substantially more than in 2008, and that HSBC expects to see that grow in 2010 in alignment with re-expanding world trade. “We are seeing strong double-digit growth in export finance again in 2010 and our lines remain available.”
A common perception, that trade financiers reacted in knee-jerk fashion to the credit crisis in late 2008, is refuted by Barclays’s MacDonald: “By and large, the actual amount of trade finance reduction was less than in other areas, such as project finance, where the risks were much larger.”
Exporters were nonetheless adversely affected, by both a lack of credit and credit insurance limits, claims Martin Hodges, head of trade, Santander Corporate Banking, one of the newest players in the UK market.
“We are slowly seeing credit appetite for markets, banks and corporate risk returning, which should improve the availability of funding for exporters over the coming months and years. But, talking to exporters, words and figures still disagree in terms of the use of available finance that banks say they are making available for trade,” he says.
According to Colin Hemsley, responsible for major corporates at Lloyds TSB, his bank has “stepped into the capacity void” left by banks that pulled out of trade finance in 2008 by closing their London offices, pulling their lines, or merging with other banks. “Even though we absorbed HBOS, we were never constrained on limits and appetite. Although we kept business to the customer base, and have not stretched our lines on a wholesale basis, we have always shown appetite for the right counterparty, bank, client or country.”
He adds: “We see an improved usage of trade finance products as a direct result of the crisis. There has been a greater reliance from corporates at the top end of the market, which need payment support to a greater extent than in previous years. Some SME customers, that are unable to get solutions elsewhere, simply want a single facility on the back of a bill of exchange.”
Gilham highlights that even in Dubai, where debt events caused exporters to review the practicalities of dealing with the Middle East region in general, banks can extend trade finance for genuine trade deals. “Where transactions are well-structured, and counterparty risk is understood, trade finance flows have been maintained,” he says.
A local presence is essential, says MacDonald, highlighting that the Barclays/ABSA group exhibits widespread appetite across Africa, where it is one of the largest overseas bank, and has the presence of a local bank in most markets. “We can help UK exporters enormously in markets like South Africa and Kenya, where we have hundreds of branches and are able to connect developing market buyers and sellers with local African trading partners.”
Santander, for its part, has a substantial footprint and customer franchise in Latin America, as well as Iberia and the US, says Hodges: “For our clients or prospects that are trading with, or are looking to invest in, these regions we offer a coordinated service that bring the benefits of local expertise, capabilities and end-to-end competitive pricing.”
Improved collaboration
Banks themselves have tapped into the risk-sharing support provided by multilaterals including the IFC and the EBRD.
Ghani adds that: “A more integrated trade finance community has developed on the back of the crisis”, with organisations such as the WTO, International Chamber of Commerce, Swift and the Bankers’ Association for Finance and Trade aligning to work on issues like capital treatment for trade.
UK Trade & Investment (UKTI) has been another significant partner for trade banks and exporters, says Nivison, flagging up a joint initiative begun in 2009 by HSBC and UKTI to support UK exporters of all sizes by helping them to capitalise on trade opportunities.
The initiative is aimed at providing training events and additional trade assistance for businesses looking for clarity on how to grow their international export business.
Nivison contends that “banks are beholden to take a role in raising awareness of exporting opportunities, and to focus on the good news coming out of the UK“.
UKTI and RBS have also partnered to deliver a series of UK nationwide events in July, November and February called Doing Business in Asia which will specifically promote export opportunities in the region and will include country and trade finance sessions. Ghani cites other initiatives at RBS, including an SME-focused exporter package offering risk management and funding that the bank launched in January 2010. “Along with that package, we have launched an initiative this year to eliminate documentary discrepancies, known as Doc Prep, which cuts down the time in which cash is received.”
Servicing skills
Ghani also highlights RBS’s trade advisory strength with the bank having access to the largest team of Institute of Export CITA Qualified international trade advisers in the UK.
“These together give us the ability to offer state-of-the-art trade finance products – such as our MaxTrad technology solution, which removes paper from the system to get trade efficiencies to customers in the UK.”
At Lloyds TSB, Hemsley underscores his bank’s willingness to support “an increasing appetite to monetise the supply chain over the last 18 months, after companies got caught in the headlights in 2008.
“Doors and minds here are open, and the quality of our service has been shown by some great feedback by Glencore and other companies.”
Trade and supply chain management is the focus of HSBC’s EasyTrade solution, one of a number of modules unveiled in recent years to connect businesses that are new to importing and exporting to HSBC trade specialists that “are able to reduce risk and find the right financing for your business”, says Nivison.
Hodges stresses that Santander has boosted its trade finance team over the last 12 months and is now able to offer local support to exporting companies through its regional corporate banking centres across the UK. “To assist UK manufacturers, Santander is currently offering some considerable discounts to its normal import and export trade tariffs to support those companies that trade internationally,” he says.
At Barclays, an “improved operational service in the last few years” is pointed to by Alan Ainsbury, head of trade sales. “We have some 40 import and export finance experts across the UK that can undertake trade cycle analyses of clients, and understand what the exporter is looking for.”
ECGD’s role
UK companies exporting with the benefit of medium-term finance traditionally look for support to the Export Credits Guarantee Department (ECGD), which transacted £2.21bn of new business in its 2009-10 financial year, ending on March 31, 2010.
This marked a 51% rise over the record low of £1.46bn in support extended to UK exporters and investors in 2008-09, and is one of several positive indicators flagged up by Patrick Crawford, ECGD’s chief executive.
“Enquiries for support have doubled in the past 12 months,” says Crawford, adding that even at this early stage in the year, ECGD is expecting its new business volume to increase materially again in 2010-11, as a result of growing civil project business alongside demand from the civil aerospace sector.
He elaborates: “We expect that we will meet an increased level of demand for support this year. Last year was dominated by support for Airbus, when one third of all company deliveries were supported by export credit agencies, double the historic proportion. It is possible that we could be asked to support a comparable level this year, at a time when some significant civil business is also coming through, given its longer lead times.”
According to Peter Luketa, global head export finance at HSBC Bank, ECGD-backed deals in HSBC’s pipeline include the offshore oil sector, specialised infrastructure, specialised engineering companies, and hospital equipment. Luketa notes an upturn in UK export activity, especially in key markets in Latin America and the Middle East, that has seen HSBC augment the size of its regional global teams and could play a role in awakening ECGD from what he terms as its “sleeping giant” function.
“ECGD has clearly recognised that the market has changed, and is now more proactive than in past, in areas other than aviation and defence,” he observes.
LC guarantees
Major UK banks have supported ECGD’s LC guarantee scheme for higher-risk markets, which was established in late 2009, and is aimed especially at UK SMEs struggling to obtain LC confirmations due to the apparent reduction in banks’ risk appetite. “The ECGD initiative lets British exporters do more in trickier markets, and is a good scheme to have in these tight times,” says Ghani.
“We now have six UK-based banks: Barclays, HSBC, Lloyds, RBS, Standard Chartered and, more recently, Bank of London and the Middle East, that have signed up to the scheme,” says Crawford, adding that ECGD has so far supported four contracts, with an aggregate value of nearly £1mn.
He adds that while ECGD has put limits in place on over 300 issuing banks in 39 countries, banks claim that secondary market appetite appears to have recovered considerably and, as a result, the private sector is better able to manage risks without government intervention. “ECGD welcomes this development so long as UK exporters are securing the LC support they need from banks – and we continue to keep the effectiveness of the scheme under review,” Crawford says.
An indirect benefit has been new ECGD business, the size and credit period of which made it ineligible for support under the scheme. In this respect, MacDonald highlights a case study closely related to the LC guarantee scheme, whereby an important client wanted Barclays to confirm a standby LC for a multi-hundred million pound figure issued by a GCC-based bank. “This would not have been possible had we relied solely on our own credit appetite,” he explains.
“Instead, we looked to sell the trade assets down, and found six secondary market investors with the necessary two-year-plus credit appetite. We approached ECGD over their appetite for a relatively short-term and very innovative, bespoke deal and they turned it around, by taking a significant percentage of the risk that let us confirm the standby LC, and then selling the risk into the secondary market, freeing up new capacity to support UK exporters.”
However Hodges says that Santander waits “with anticipation how the new government intends to take the role of ECGD forward”. The new government’s approach to the economy in general has been set out in recent speeches by the Prime Minister David Cameron and secretary of state for business Vince Cable. Crawford notes that “ministers have begun considering the strategic direction they want ECGD to take”.
The British Exporters Association (BExA) has called upon the new UK administration to reinvigorate ECGD; “by enhancing the marketing of its services to the UK’s exporters and expanding its product range”.
Susan Ross, the BExA chair, spoke at a spring reception at the House of Commons in late May, arguing that inroads into the UK’s unemployment problem could be made via a greater focus on exporting.
She referred to recent BExA research, which demonstrates that: “UK exporters are at a distinct disadvantage to their EU counterparts”, emphasising that the expired Labour administration presided over a decline in ECGD business volumes of over 74%. Over the same period, Italy’s Sace doubled its business; Belgium’s ONDD trebled its volumes; and Norway’s Giek lifted its support nearly fivefold.
“Other countries’ governments know the benefit of exporting to their economies, and enable trade to happen with developing nations, which are the only ones that are consistently growing but where there may be scarce commercial capacity,” Ross insists. GTR
