In May, Credit Suisse took part in a US$592mn export credit facility, which formed part of a US$860mn financing to support the construction of a series of power plants in Indonesia. The financing was raised in favour of the Indonesian power company PLN, and deal was guaranteed by China’s Sinosure (for a full deal analysis see p.100 of this issue). Credit Suisse participated in the deal with a commitment of US$25mn, and it marks the bank”s first Sinosure-covered export credit deal.
The transaction highlights two points, one being the resilient nature of export and trade finance, and the other being the growing importance of the Asian market for Credit Suisse, as well as other European banks.
Christian Gut, managing director, trade finance, corporate clients, Switzerland, at Credit Suisse, remarks: “Trade finance is an anti-cyclical business. Given the present difficulties, our trade finance products are becoming increasingly attractive.”
He adds: “We are seeing more ECA-backed and private insurance business, as banks and corporates look to offload certain risks and alleviate the refinancing.”
His comments reflect the prevailing opinion among many of the Swiss banks and financial institutions. Global trade has to continue, and when corporates are faced with tightening liquidity, the appeal of using their trade flows as collateral, or turning to export agency-backed funding increases.
Over at UBS, Switzerland’s other big bank, Jacqueline Keefer, executive director, head of export finance, also reflects: “We have seen a return to ECA financing following the credit crunch, as local currency funding is drying up and as global liquidity tightens.”
Gut also observes that the export markets are generally moving eastward, and notes Asia as a region holding much potential for export and trade finance activities.
Credit Suisse’s trade finance team is actively looking for a local export finance expert in Singapore to cover the Asian ECA market. This eastward expansion also reflects the bank’s overall strategy, following the announcement in June that Credit Suisse won approval to set up a securities joint venture in China.
Swiss economy and its exporters
The success of the export and trade teams partly rests upon the ability of the Swiss economy and exporters to weather economic hardship. In spite of the much-publicised problems afflicting the banking sector, the Swiss economy seems to have initially rebuffed the worst.
GDP growth averaged 3.1% in 2007. In the fourth quarter of 2007, real gross domestic product increased by 3.6% year-on-year partly due to high exports of services and consistent consumer demand.
However, by the first quarter of 2008, real GDP only grew at an annualised rate of only 1.3%. At a news conference held in June this year, Jean-Pierre Roth, president of the Swiss National Bank, explained that the slowdown was the result of three main factors. One being that the economy has previously been growing at an exceptionally high rate between 2006 and 2007, and that a slowdown was inevitable. The second, he said, was due to a slowdown in exports, and the final reason is due to problems on the financial markets leading to a drop in stock market activity.
According to Roth, exports account for 52% of Swiss GDP, which means the Swiss have a solid global presence. However, this also also means the “international environment has a considerable impact on economic developments in Switzerland.”
Yet, data from the insurer Atradius suggests the Swiss export market has remained buoyant. Between 2006 and 2007, Swiss exports rose by 11% in this time period. Atradius also sees Swiss exporters becoming less reliant on European markets, with exports to destinations such as China, India, Korea and Brazil growing well above the average growth figure.
This trend is leading to higher requests for Atradius’s trade credit insurance products, according to Lucien Hoffman, country manager for Atradius in Switzerland.
“We are seeing strong demand from primarily large and medium-sized clients, and there are several drivers for this, one being that Swiss companies are turning their attention to growth markets in Asia and Eastern Europe in order to meet their expansion plans,” he says.
There are signs that exporters are also looking towards Sub-Saharan Africa, as Keefer from UBS observes: “We have been active in Africa, in particular Nigeria, supporting exports of heavy machinery and other capital goods needed for the development of infrastructure.”
Similarly, Erwin Freiburghaus, executive director, head of product management, trade finance, at UBS remarks: “In the Latin American market we are seeing more enquiries for trade-related financings, this is probably due to the effects of the credit crunch.”
And concurring with Credit Suisse’s viewpoint, he adds: “We are seeing Swiss corporates doing more business in Asia.”
However, statistics show that the predominant export markets remain within Europe. According to official Swiss government figures in 2007 and for the first five months of 2008, Germany remained the country’s top export market, with the only non-European markets making it into the top 10 being the US and China.
Some emerging markets, including India, Russia, Poland and Turkey feature in the top 20 export markets for Swiss exports.
Developing supply chain solutions
Although many theorise that the current market climate is more conducive to increased levels of trade finance, there are also those that continue to herald the end of traditional trade finance instruments such as letters of credit. These commentators see open account financing solutions as the way forward, and are racing around to find the right type of product to offer their clients.
Swiss financial institutes are not immune from these trends. As Azim Walli, head, product management, trade finance at Credit Suisse, remarks: “Any bank who offers trade finance solutions needs to think about the best way to support their clients’ open account requirements.”
However, he adds that the banking community should not be too quick to forecast the end of traditional trade finance.
“The so-called demise of letters of credit has not materialised in Europe. Within Europe, I see that LC volumes are relatively flat, rather than falling. This differs from Canada and the US where I saw LC volumes generally falling in relation to open account transactions,” he adds.
According to 2007 data from Swift, in Switzerland there were nearly 30,000 import LCs issued via structured Swift messages, and over 45,000 export LCs received. In addition, there will also be LCs sent without using structured messages, but there are no current estimates for this number.
However, with European LC volumes seemingly reaching a plateau, many heads of trade finance products across the banking community, including in Switzerland, are figuring out how best their bank can tap into the wealth of global trade flows that are funded without LCs or documentary credits. Rough estimates suggest that non-LC trade accounts for around 80-85% of world trade volumes. And with more corporates tending to trade on open account terms, the banks face the risk of being pushed out of the trade flow.
One solution is for banks to help make the whole trading process more efficient through providing a form of automated online processing and invoicing service. Within Europe there are already three e-invoicing offerings: Swift’s trade services utility (TSU), ACBI’s e-invoicing and e-payments and EBA’s e-invoicing initiative.
However, the problem for the bank is to make the decision of which automated multibank trade platform they should adopt. In Switzerland, as is the case across Europe, the question is which system will emerge as the industry standard, and which one is worth investing time and money in? The last thing a bank wants to do is invest in a system that might emerge as the ‘betamax’ of the supply chain finance world, remarks Credit Suisse’s Gut, and will ultimately be pushed aside in favour of a far more widely adopted model.
The implementation of a new system presents its own challenges, and this is something Credit Suisse’s Walli tackles in a recent article written for The Bankers Association for Trade and Finance (Baft). He asks: “Does increased electronic efficiencies for the client mean increased manual data entry for others in the multi-bank group?”. “How committed will bank partners be in the long-term – can everyone continue to sustain the technological infrastructure? How do you sustain a multi-bank platform for your large corporates and a proprietary single channel for your SMEs?”
Banks, including those in Switzerland, are facing the issue of whether to be an ‘early adopter’, and win clients by being ahead of the competition, or being an ‘early follower’, and learn from their competitors’ mistakes and ultimately offer a potentially more popular product.
Credit Suisse’s Gut reflects on this dilemma, remarking: “We don’t want to be ‘first mover’ at any price but would like to be an ‘early follower’. For this we closely observe the trends and want to see what will emerge as the industry standard. We also need to work out the benefits Credit Suisse can bring to an already existing financial relationship between two clients.”
Redefining the bank’s role
The need for banks to redefine their role in the trade process between two clients became a far more urgent issue in the US and Canadian markets compared to the European markets. This is in part due to the high volumes of trade conducted between Canada and the US, where both trading parties feel comfortable with the risks without the backing of a bank guarantee.
Many of the US and Canadian banks have been developing receivable-financing solutions in order to help support this type of open account business. For instance, Canadian banks have worked to increase the cash flow of suppliers by buying their receivables.
In the US, however, there is a greater tendency for banks to buy the debt from the obligor. This means the US banks are dealing with the corporate risk of a usually large and well-established company, a risk they are usually more comfortable with.
The concept of providing some form of receivable financing, and invoice processing service, is spreading throughout the banking community, and is something all banks, including Swiss banks, will no doubt investigate.
At UBS, the bank has already opted to join Swift’s Trade Services Utility (TSU). It also offers clients an online platform known as UBS Trade Finance Access, which is a client online interface completely integrated into the bank’s back office. The facility allows UBS customers to carry out their trade finance transactions online.
“We can support our clients from the beginning to the end of their trade finance supply chain,” asserts Freiburghaus.
He also observes that the long-term trend in the market is likely to move away from traditional trade finance tools, with any renewed interest in the products being short-lived: “There is a shrinking market for letters of credit, and even with the credit crunch I don’t see any huge swing back in favour of letters of credit.”
Rising appeal of credit insurance
Another trend UBS’s Freiburghaus has noted is the increased use of credit insurance by Swiss clients as a means to fund their trade transactions. “To reflect this, we are beginning to look at ways in which we can collaborate with the insurance market,” he adds.
“One of our current strategic initiatives is the assessment of existing and/or planned trade finance tools and solutions available on the market for corporates.
“We want to position ourselves by the end of the year enabling us to even better meet the requirements from our clients”.
Again, it is a similar theme of wanting to establish what the market standard in supply chain finance will be and avoid making expensive mistakes.
“We want to position ourselves by the end of the year enabling us to even better meet the requirements from our clients,” he adds.
Developments in the trade finance market are set to benefit the trade credit insurers in Switzerland, as Atradius’ Hoffman remarks: “Competition on trade terms is also driving our business.
“Exporters are being forced to operate more on ‘open terms’ [ie unsecured delivery of goods] they have to drop their requests for letters of credit from buyers. Then they try to offload the risk entailed in this “open terms” trade. You could say that credit insurance in some areas is replacing letters of credit.”
He adds that another important driver is that often banks are not able to judge the value of the receivables, so they usually demand insurance as a precondition for their trade finance services. “Based on the business we see, we estimate that 60% of exporters use their credit insurance as collateral for trade finance purposes in one form or another,” he comments.
Banks are also turning to insurers to cover their trade-related exposures. For instance, a Swiss bank involved in a letter of credit to secure a Swiss export to Turkey might have already reached its exposure capacity on Turkish banks. By turning to the insurance market they can expand their capacity levels through insurance.
Taking the next step
NBAD Private Bank (Suisse) in Geneva, a fully independent and wholly-owned subsidiary of National Bank of Abu Dhabi Group, did make the decision in May to select a software provider to automate and manage its trade finance offerings.
The bank announced that is has gone live with Credoc, a software solution provided by MIT, an independent Swiss company specialising in the development of software solutions for banks. The solution will support all the bank’s trade finance and documentary business activities. And it will be integrated into the bank’s IT operation services that are outsourced to B-Source, a Swiss service provider in business process outsourcing.
In an official statement, Urs Ruppli, chief operating officer at NBAD comments: “We were looking for a highly user-friendly software that we could implement in a very short timeframe. Credoc proved to be an answer to both issues.
“Indeed, whatever transactions our users perform in the system, they always handle them using the same generic process, which makes their life much easier. Furthermore, the system went live in less than three months.”
Within Switzerland, NBAD is a niche player compared to the big banks, concentrating on markets it is most familiar with in the Middle East and North Africa. The bank is mainly involved in trade finance structures based on documentary credits, but can do structured finance where necessary.
Reflecting on trends in the Swiss trade market, Rabih Bleik, trade finance marketing manager at NBAD Private Bank tells GTR: “Trade with the MENA region remains based on letters of credit for the large part, but depending on the destinations and counterparties, trade is also shifting towards open account.”
Trade and export finance could enjoy a slight renaissance period in Switzerland thanks to market uncertainty, however longer-term trends are already in place. As momentum in the open account financing market grows, banks will have to ensure they are ready to select new practices and concepts, as well as reap the rewards of their more traditional trade activities.