The World Trade Organisation (WTO) calls trade finance the "lifeblood of trade" -- an apt conclusion considering as much as 90% of trade needs credit.
This necessity for financing meant when credit markets dried up in 2008, things got dicey. In the darkest moments, experts estimated that there was as much as a $100 billion shortfall in trade financing globally and fears circulated that 2009 could be the year trade sputtered to a stop on account of a lack of credit.
In the end, things did not turn out that way. While global trade volumes did drop -- 17.6% year-on-year according to the World Bank -- it was not due to a credit crunch in trade finance. The overall decline in demand, especially in Europe and North America, was due to the drop in trade itself, not because of a lack of credit, the Bankers' Association for Finance and Trade (Baft) wrote in a September 2009 report.
"We started last year with a collapse in trade, a drying up of trade finance, concerns that donors would reduce funding for Aid for Trade, and worries that protectionism would kick in," said Pascal Lamy, director general of the WTO, in a February speech. "And yet one year on from the onset of the crisis, we see that, to this point at least, the multilateral trading system has proven its sturdiness."
That sturdiness is especially evident in Asia. Though Asia's fourth-quarter 2009 import and export volumes outperformed Europe and other regions only by a hair according to WTO statistics, trade finance in the region certainly has not been a problem. Regional banks learned their credit lessons during the 1997 Asian economic crisis and were well prepared for the latest financial shock.
"When the crisis broke out, Asia's banks and companies had solid capital positions, low leverage, and little exposure to toxic assets," said John Lipsky, first deputy managing director of the International Monetary Fund, in an October 2009 speech. "As a result, banks have been both willing and able to lend, which has meant that credit has not slumped by as much as in other regions."
Now Asia is driving global trade. With flows rebounding -- especially intra-region trade -- local financial institutions and the leading global trade banks have the upper hand to capitalise on the trade growth and grab market share where others have pulled back.
"We were not very hurt during the crisis, which gives us an advantage to expand now," said Frank Shih, executive vice president in the commercial banking product division at Taiwan's Chinatrust Commercial Bank. "Many global banks that were ambitious in Asia now can't be because of capital constraints. We [Chinatrust] have the ambition to expand our market and will use our branch network to expand and promote our trade business."
Of course, lessons were learned, mostly around the assessment of risk and financing structures, but for the most part the turmoil of 2008 and 2009 has been a boon to Asian trade finance.
Due diligence to the front
"All interaction has changed toward more risk reduction or protection," said Songpol Chevapanyaroj, executive vice president of the corporate and small and medium enterprise division at Thailand's Kasikornbank, on the recent changes in Asian trade finance.
After numerous large and well-documented bankruptcies, traders want protection from buyer default and they're willing to pay for it. "From all the major trade banks, we saw [in 2008 and 2009] an increase in pricing of risk for trade assets," said Simon Constantinides, Asia-Pacific ex-Greater China head of trade and supply chain at HSBC. "That did not lead to a decline in trade volumes, general economic conditions did. Companies recognised that risk pricing was below where it should have been." And so they were willing to insure against it. For example, when HSBC launched marine cargo insurance in Malaysia last year, it booked M$100 million ($29.9 million) in new coverage during its first month alone.
But corporations are not the only ones concerned; banks realised they too must be wary of their customers because they are, after all, exposed to the banks. "If you have a creditworthy client that is supported by five banks and three out of those go out of business at the same time, it impacts the client adversely," said Kenny Wei, Asia-Pacific head of trade and commodity finance at Rabobank. "A good credit can potentially become a weak credit."
Ironically, due diligence was something everyone knew they should be doing before the credit crunch. Buyers were supposed to know their suppliers and banks were supposed to evaluate clients before extending them a line of trade credit, but, as happens during extended growth periods, standards slipped and less reliable counterparties were engaged in the drive for more growth.
When the world economy turned south in late 2008, Asian banks witnessed the troubles banks in Europe and North America had and counted their lucky stars they did not have the toxic asset load of their foreign brethren. However, while trade finance was acknowledged as one of the more secure forms of lending, institutions needed to make more thorough checks.
"We are doing more due diligence about the customer," said Shih on what changes occurred in Chinatrust's trade business. "Asking them who they sell to, what they buy and on what terms." In short, Asian banks were reminded they needed to do their homework -- but not without a few sacrificial lambs.
Financing traditionally
"Non-traditional TCF [trade and commodity finance] banks took a more corporate approach, instead of focusing on the transaction and the underlying collateral," said Rabobank's Wei on the funding methods some institutions' trade finance businesses used. "When you just lend outright, without the collateral aspect of the underlying trade flows, it's very difficult to offset your exposure."
Traditionally, a trade finance transaction is self-liquidating. Capital is lent to cover the cost of goods while they are in transit from a seller to a buyer with the goods themselves used as collateral. Upon arrival and the buyer's payment, the transaction automatically liquidates. But in the past decade a new breed of trade bankers tried to improve upon traditional trade structures with negative consequences.
"The credit crunch has demonstrated the dangers inherent in portfolio concentration," said Rudy Tandjung, head of transaction banking at Indonesia's Bank Permata. "Before the crisis our bank had many portfolios in steel that after the crisis we had to revisit and reduce the limit on, in line with the collapse of steel prices."
Permata was not the only Asian institution hit by volatility in the commodities sector, the metals trade finance business at Singapore's DBS was also hurt. Regional banks largely pulled back, but few -- if any -- exited trade finance completely.
It was a different story with foreign institutions. "We see shrinkage in some of the niche European banks," said Tan Kah Chye, managing director and global head of trade finance at Standard Chartered bank. "When times were good, they were flying everywhere with their suitcase and selling their products, but when times were bad they'd just fly back home."
Nobody would name names, but it is widely understood that speciality European and Scandinavian institutions were those who pulled out of the Asian trade finance business.
Local banks in the region took advantage of others misfortune. Australia's ANZ, Malaysia's CIMB and Singapore's DBS are all known to be actively expanding their trade business through physical growth. Other institutions, such as Chinatrust, are using the opportunity to increase their share in target markets.
"Though affected, Asian banks successfully shifted their focus and made tremendous efforts to find intra-Asian trade solutions," said W Adji Wibowo, head of regional transaction banking at CIMB Group. "In the ensuing period after the 2008 credit crunch, we took the opportunity to consolidate and transform our trade finance business." He said the bank's goal was to be the top transaction banking provider in Southeast Asia.
"We are strengthening our focus on the cross-strait market from Taiwanese customers only to Hong Kong, to Vietnam and to the USA," said Chinatrust's Shih.
Partnering to growth
While Asia's local banks may want to grow, they cannot do it alone. To improve their access to capital and navigate the minefield of potentially defaulting counterparties, institutions have turned to export credit agencies and large global banks for some help.
In just the past six months, the Japan Bank for International Cooperation lent $100 million to India's ICICI Bank and Korea Eximbank provided $50 million to the Bank for Investment and Development of Vietnam. Both loans were made to help financing of intra-Asia trade flows.
Even international organisations have upped their level of aid. After the Asian Development Bank boosted its trade credit facility to $1 billion last April, more than 30 regional banks, including Indonesia's Bank Mandiri and Sri Lanka's Bank of Ceylon, joined the programme.
From large global banks, Asian institutions want to learn best practices and, at least to a limited degree, investigate outsourcing. "We have selectively seen local players reach out to us more in the post-crisis period," said Standard Chartered's Tan. "Where we help them is in the area of sharing best industry practices to our common benefits. These can be in the space of how Swift's TSU [trade services utility] is developing or standardising letter of credit application forms."
On the outsourcing front, Yanti Agustin, Asia-Pacific head of global trade services at J.P. Morgan, said the bank has seen an uptick in the number of inquiries for back office or similar outsourcing arrangements from the region over the past 18 months. "Local banks see a lot of synergy in working with a large, international institution," she said. "To start growing your international business, you need to have a strong back office function and these partnerships enable them to speed up the client acquisition without having to make an investment up front."
The only local institution to confirm that it had partnered with a global bank was Kasikornbank. Chevapanyaroj said his institution was working with a global bank to offer its customers better cross-border solutions. He declined to indicate the partner. Previously announced outsourcing arrangements include OCBC with J.P. Morgan and Maybank with Wells Fargo Bank (formerly Wachovia Bank).
Whether they need assistance or not, Asian institutions are in the right part of the world to be growing their trade finance businesses. The World Bank predicted global trade volumes will rise 4.3% over 2009 this year and another 6.2% in 2011; growth that will be led by Asia. While this does not bring volumes back to where they were in 2008, it does bode well for the region's banks whose dominant local market positions and strong balance sheets make them increasingly sought-after trade partners, both by foreign banks and corporations.
"Banks really now do appreciate trade finance more than ever," said Christopher Lewis, Greater China head of trade and supply chain at HSBC. "I see the crisis [more] as a positive than any sort of negative."
The lesson of the past two years was really more a reminder that trade finance is a simple business where banks are best advised to follow the business mantra "keep it simple, silly!" to succeed. Kiss, is never a bad idea.
This story was first published in the Asian Trade Finance Yearbook supplement to the April 2010 issue of FinanceAsia magazine.
