Wednesday, September 16, 2009

Trade finance - A "rude awakening" for banks as they seek to innovate

A show of hands for those corporates that have lost trust in their banks post-financial crisis. At this morning's conference session at Sibos in Hong Kong on the shortage of trade credit, the vote was fairly overwhelming with a show of red cards from those corporates in the audience.

The leading trade finance bankers on the panel had no choice but to acknowledge that they have some work to do to restore corporates' trust. "Corporates believe trust has been damaged," said Kah Chye Tan, global head of trade finance, Standard Chartered Bank. However, he added that banks also had a responsibility to be prudent.                             

"Trust has dissipated," said Lawrence Webb, global head of trade and supply chain, HSBC. "However, I don't think clients distrust banks at the transaction level. But we have some way to go to rebuilding trust at an industry level."

John Ahearn, managing director, supply chain managment, structured trade and asset optimisation, Citi, was more inclined to apportion the blame equally between banks and corporates, saying that corporates are largely sophisticated buyers that should have understood what they were buying. "We [still] have clients coming to us asking to borrow enormous amounts of money [based on] thin prices." When it comes to apportioning blame, Ahearn says "we (banks and corporates) all got drunk together, but now the party is over.

While it may not be the best time for new clients to approach banks asking for credit, Webb said that HSBC's trade weighted index indicated that Hong Kong companies were expecting increased access to trade finance in the months ahead. But what about those banks that now have substantial government stakeholdings? Will they be extending credit in the wake of the financial crisis? Tan of Standard Chartered seems to think that they will be forced to withdraw to their home market and therefore reduce lending.

Ahearn, representing Citi, which the US government has a more than 3o% stake in (apparently the US government has announced it wants to sell its stake) asked whether the UK government would be happy with RBS lending money in Singapore? The same could be asked of Citi, although the US government's stakeholding in Citi is much less than the UK's 70% shareholding in RBS. Tan ventured that the money governments pumped into banks to prop them up during the crisis equated to a form of protectionism or a form of subsidy.

In an effort to plug the gap in the secondary trade finance markets, The International Finance Corporation with the support of the G20 group of countries set up the Global Liquidity Program, yet it is unclear whether the millions pledged to that program have filtered through to those banks or companies that actually need it. There also appears to be an enlarged role for Export Credit Agencies to play, however, they appear to be playing catch up.

 "We need to make sure these [IFC] initiatives are in place on a long-term basis," said Webb of HSBC, "as opposed to being reactive." The challenge for the banks in the trade finance space is not only restoring credit but also being able to move with companies as their supply chains evolve.

Tan said banks needed to move with companies as they expanded their global supply chains and not just provide domestic solutions. However, Ahearn cautioned that banks should not underestimate the risks in terms of tax and financing issues in cross-border supply chain or trade finance. "They may be in for a rude awakening if the regulators look at this," he said.

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