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2017 was the decade’s worst year for trade finance

Global / 07-03-18 / by
trade finance

Big banks just had their worst year for trade finance since the turn of the decades, according to new figures.

In 2017, trade finance revenues among the world’s top 10 banks fell by 3%, after a 9% tumble in 2016. It marked the fourth successive year of decline, with the combined volume of traditional and structured trade finance products worth US$5.8bn in the calendar year.

This is despite the fact that trade volumes performed remarkably well last year. The CPB World Trade Monitor shows that trade grew by 4.5% from the year before, but this is not reflected in the data produced by analytics company Coalition.

Coalition tracks the business done by Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Deutsche Bank, HSBC, JP Morgan, Societe Generale, Standard Chartered and Wells Fargo, the 10 largest transaction banks globally.

In a release to accompany the data, Coalition says that the industry picked up in the second half of 2017, with shrinking margins helping contribute to lower books despite a pickup in overall volume. Structured trade products such as export finance and supply chain finance performed well, but commodity trade finance “remained challenged, subject to soft demand in a subdued market environment”.

This roughly correlates with market sentiment obtained by GTR.

Aziz Parvez, Asia Pacific head of trade and supply chain finance at Bank of America Merrill Lynch, tells GTR: “We saw, compared to some of the previous years, within the space of letters of credit (LCs), a number of our clients moving away from that, to open account. So that did result in a reduction in the volume of LCs. But beyond that, I wouldn’t say it was the worst year. Not one of the best years, but overall it was quite OK. In terms of values, it was down for commodity clients. Demand wasn’t that great, but we didn’t see too huge a change.”

When presented with the figures, another regional head of trade finance at one of the top 10 banks said that volumes continue to be affected by regulation, which means banks have lots of liquidity chasing fewer and fewer trades.

“You also – because of the heightened competition at the top end – have increased client flows at this top end offset by compressed margins. So the overall result is flat trade industry volumes with lower margins, where the effect is lower revenue. I can say we’ve seen pockets buck the trend – notably supplier finance, where revenue for us alone in 2017 was up nearly 30%, as well as accounts receivables purchase, both of which are the more structured and advisory-led pillars within the business,” said the banker, who wished to remain anonymous.

One more senior figure at one of the featured banks, who also spoke on condition of anonymity, was surprised by the trend, viewing last year as having been much improved on the year before.

“If the figures are down, then it’s still due to low commodity prices, deceleration in the pace of trade liberalisation and the lack of cohesive innovation to keep pace with global supply chains. Despite economic nationalism pulling the world towards isolationist protectionism, there are pockets of optimism for 2018. A recovery in commodity prices is likely, while innovation is gathering pace, which will hopefully help improve the complex supply chain world we live in,” the senior figure said.

According to the data, other areas of transaction banking showed some improvement, with cash management revenues growing by 7%. Regionally, Asia Pacific outperformed the other regions for the first time for three years, driven by improved volumes and increased net interest income, particularly in liquidity management.

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