Geopolitical tensions and high interest rates are squeezing trade finance revenues, though receivables finance growth is set to spur a rebound in activity, the International Chamber of Commerce (ICC) says.
In the latest iteration of its Trade Register, published this week, the ICC Banking Commission estimates that trade finance volumes fell by 4.7% in 2023 as banks grappled with a “challenging” year marked by the Ukraine conflict, Red Sea crisis, as well as high interest rates and slowing demand in major economies.
While this drop was less steep than previously forecast, the decline in activity affected the bottom lines of trade finance banks, which saw revenues drop 6.6% in nominal terms to US$61bn last year.
“Trade and supply chain finance experienced more pronounced pressures in 2023 as corporates deleveraged amid high interest rates. Revenues saw a slight contraction, driven by tighter margins and slower trade flows,” the report finds.
The register includes data from 22 of the world’s largest trade banks in Asia, the Americas, Europe and Africa, accounting for trade and export finance transactions worth in excess of US$23tn – about a quarter of the total. It was created with support from Global Credit Data and Boston Consulting Group (BCG).
The difficult business environment was felt most acutely in documentary trade finance, yet open account solutions also suffered.
Regionally, banks in the Asia Pacific experienced the “most notable” contraction in trade revenues, while the EU’s decline was less severe and helped “soften” the overall impact, the report says.
The ICC and BCG quizzed financial institutions on the reasons for weakened activity in August, and based on the survey, report that a “mix of factors” contributed to a challenging year for trade finance.
73% of respondents identified supply chain disruptions from “increased conflict” as a moderate, high or severe threat, while emerging capital treatment regulations, margin erosion, and increased competition between bank and non-bank trade finance providers, were other issues cited.
Despite last year’s difficulties, there are bright spots for the trade and supply chain finance (SCF) industry.
The drop in nominal trade finance revenues in 2023 was less severe than the 7.4% drop forecast in last year’s register, and there are signs of a rebound in profits since a “trough” in the middle of 2024.
Nevertheless, the register forecasts a “slower recovery” in global trade finance revenues over the next two years – rising to US$62bn this year and US$64bn in 2025. Growth is then expected to “pick up by 2028”.
The ICC’s register once again highlights the shift away from traditional trade finance products such as letters of credit (LCs) as corporates increasingly eye open account solutions instead.
Documentary trade products are set to experience “below average” revenue growth of 3.7% CAGR over the next decade, largely due to a “slowdown” in LC usage.
Other products, such as commodities and structured trade finance, are expected to experience “some growth”.
Receivables finance is now the “fastest growing” trade finance product, with nominal revenues slated to rise 5.4% CAGR over the next decade, it says.
Payables finance is “marginally” less attractive and forecast to achieve 4.7% CAGR over the same period, with the ICC noting the product has likely been affected by rules mandating disclosure of SCF usage in a company’s financial accounts.
“There are already early signs that the disclosure rules and Basel III capital treatment regulation are driving reduced demand for payables finance. Instead, demand is being channelled into corporate receivables finance, which continues to benefit from balance sheet de-recognition,” it says.
High interest rates are another key challenge for the SCF market, though large corporates say the product remains vital for SME suppliers.
Once again, the register showed markedly low default rates across a range of trade finance products such as import and export letters of credit, performance guarantees, supply chain finance and export finance.
But the hope is, with greater input, the register can continue to ensure trade finance receives favourable regulatory attention.
As reported by GTR earlier this year, the ICC has lobbied for a greater number of trade finance banks to respond to its register, launched by the ICC’s Banking Commission in the wake of the global financial crisis more than 15 years ago.
The ICC is still pushing for more banks to contribute to the register and enhance the “pool of data”, says Tomasch Kubiak, policy manager within the ICC Banking Commission.
