For decades, global trade has notched exponential growth. In turn, companies, big and small, from southeast Asia to Latin America, have exhibited voracious appetite for global banks’ trade finance products. These include stand-by arrangements, letters of credit, overseas accounts, advisory and documentary support to guarantees.
Post financial-crisis, the simple, capital-light business of trade financing has increased its appeal to lenders while supply-chain finance, where banks manage the collection and funding of receivables within a network of firms, has emerged as another source of revenue growth.
Last year, therefore, was a big blow for global trade volumes and banks’ trade-finance business. As Euromoney reports this month, global trade volumes grew 2.8% last year, the weakest rate of expansion since the financial crisis. According to Dealogic, global trade finance volumes have been much weaker than headline global import-export numbers. The former totalled $114 billion in 2012 while year-to-early December volumes fell to $75 billion.
Euromoney’s Trade Finance survey, which polled over 2,000 companies, paints a dispiriting picture. It reveals margins are too thin in high-volume markets of Europe and Asia. There are simply too many lenders chasing a client base whose growth is not meeting expectations, while yields on short-term trade-finance facilities have fallen amid negative real policy rates.
By contrast, the survey shows corporate clients in Latin America and Africa are facing diminished credit supply, and rising credit costs, as global banks fear counterparty and due-diligence risks in markets roiled by economic, commodity and corporate governance shocks.
This should worry policymakers. Bank-intermediated trade finance yields tangible social benefits by providing, or optimizing, working capital for companies and reducing payment risk to support domestic and international trade. If regulatory forbearance on onerous due-diligence demands is not forthcoming, banks need to increase their technology investment further through data analytics, and automated transaction monitoring.
For their part, policymakers need to redouble efforts to boost trade. According to the World Trade Organization, since 2008, G20 nations have slapped trade-restrictive measures on $839.5 billion of merchandise imports, with the protectionist lurch intensifying over the past year.
Trade finance bankers, therefore, need to think strategically about how to manage their business, as their technology and compliance costs rise, and as they face disintermediation threats from cash-rich corporates, crowdfunding initiatives, and non-bank lenders in the vendor-financing market.