Standard Chartered-Lloyds’ Asia partnership: the future?
The agreement between Standard Chartered and Lloyds Bank to allow the latter to directly issue letters of credit locally in some 20 Asian markets and benefit from local currency settlement – using the emerging-market-focused bank’s infrastructure – has been touted as a win-win arrangement for both lenders. But the deal is not without its downsides.
While the rate of economic growth has slowed in the past couple of years, many of the region’s economies continue to expand more quickly than western economies – particularly China, which is expected to report GDP growth of 7.5% in 2013 and which is the world’s biggest exporter.
A global transaction banking survey published last week by Misys and Finextra identified Asia Pacific (Apac) as providing the biggest growth opportunities overall.
“All Apac banks saw the most opportunity within Apac, reflecting not only that these banks are looking close to home for new business in markets they understand, but also the dynamism in the region,” the report states, adding that a quarter of all European banks were also focusing on Apac – in comparison, 12% were prioritizing Latin America and 8% Middle East and Africa.
While companies in the west look to harness opportunities presented within Asia, transaction banks are likewise positioning themselves to support their corporate clients in the region.
This impetus is not restricted to banks operating at a global level. Announced last week, Lloyds Bank’s partnership with Standard Chartered illustrates the continuing importance of Asia to corporations and consequently to transaction banks.
Intended to help UK companies that import from Asia, the partnership between the two banks will allow Lloyds to issue import letters of credit in 20 countries within the region, including China, India and Korea. Corporate clients in the UK will benefit from in-country document handling as well as the ability to settle invoices in local currency.
“Standard Chartered can open letters of credit on our behalf, more quickly and in the right time zone,” says Andrew England, head of transaction banking at Lloyds Bank Commercial Banking.
“Exporters will be in a position to discount letters of credit and get funding against letters of credit, anticipating payments and receipts in order to improve working capital for those exporters. Through this our importers might be able to extend or improve their payment terms.”
Robert Mancini, senior analyst at Celent, says to issue letters of credit, banks need to invest in technology and infrastructure within the relevant countries. “You also have to have local expertise in order to be able to do those transactions,” he says.
“All in all, that partnering with a bank that has infrastructure implemented across 20 different Asian countries and a strong reputation in the marketplace makes a lot of sense.”
Unlike other institutions, which have adopted a white-labelling approach to support their trade requirements in Asia, Lloyds is actively promoting the fact it is leveraging Standard Chartered’s capabilities.
England adds that Lloyds’ goal is to become the UK bank of choice and that the bank is not looking to establish a major infrastructure in the region to support trade. “It therefore makes sense to leverage another bank’s capabilities in order to help our clients,” he says.
Nancy Atkinson, senior analyst at Aite Group, says that as Lloyds does not have the presence in Asia, which is necessary to have direct relationships with suppliers, the bank also lacks the information to assess those suppliers’ creditworthiness or ensure it collects from those suppliers.
“Standard Chartered has those relationships,” she says. “By partnering, Lloyds is relying on Standard Chartered to provide guidance to Lloyds and their clients regarding the financial wherewithal of Asian suppliers, and the general strength of the various economies and individual country regulations and laws to follow.”
She adds that the benefit to Standard Chartered is that the bank will become involved in Lloyds’ issued letters of credit in Asia, and will probably receive some compensation from Lloyds for the expertise and guidance they provide.
David Hennah, head of trade and supply chain finance at Misys, says bankers in Asia remain optimistic about the prospects for continued volume growth in trade. “Strategically, a bank may choose to re-engineer its infrastructure by investing in technology upgrades and creating innovative products and services,” he says.
“Alternatively, alliances may be formed with strategic partners who already have the people, processes, technology and infrastructure in place to plug product gaps and service shortcomings.”
Nevertheless, Celent’s Mancini argues that the deal is not without its downsides. “The first one would be that you’re relying on another bank to offer these services, so you’re relinquishing a lot of control,” he says.
“What this implies is, as you look at your future growth, you’re really relinquishing your product-development capabilities and your strategic roadmap to an external force.”
Mancini says a further downside is the additional complexity involved in successfully integrating the banks sales, products and technology with a third-party bank. “As the other bank makes changes, it might require you to make changes on your end, which is also beyond your control,” he says.
Despite the possible pitfalls, it is likely that more banks will follow suit in due course. Aite’s Atkinson says: “I expect that this agreement is not exclusive, meaning that both Lloyds and Standard Chartered can develop similar relationships with other banks. “It is likely they will, because this issue is common for banks that have no presence in Asia.”
Mancini cites four reasons that could prompt others to adopt a similar strategy:
• The opportunity to harness revenue growth in emerging markets is prompting many banks to focus on these countries;
• Technology is becoming complex and expensive – banks can leverage third parties to avoid the need for additional investment;
• As regulation becomes more complex, it is harder for banks to remain compliant in all the markets in which they operate – leveraging the strongest players in these markets can alleviate this burden;
• Banks are leveraging each other’s core competencies to strengthen their own capabilities and compete in the marketplace.