Trade finance has rarely enjoyed such a high profile among transaction banks in Asia-Pacific. Rapid economic growth, dynamic trade routes, tightening liquidity in markets like China, and the poor economic performances of many developed economies have placed the region’s trade story on the map.
For Pierre Veyres, BNP Paribas’s global head of global transaction banking, his location in Singapore is testament to the importance of the Asia-Pacific business to the bank’s overall operations. “Of the top Fortune 500 MNC [multinational corporation] names, Asia-Pacific contributes around 20% of their business for most of these companies in terms of revenues, and that is increasing much faster than anywhere else,” he said. Moreover, the region’s transaction banking business is growing at around 10% to 12%, or almost three times faster than in Europe or the US.
Veyres has been in the job for a little more than a year. Before taking on the role last January, he was deputy head of the bank’s corporate and transaction group, and not surprisingly he is bullish about BNP Paribas’s transaction and trade finance businesses in the region. “We are quite confident our investments are going to pay off, and we expect to multiply our trade finance revenues by threefold during the next three years in the region.” These investments include $50 million being spent on the bank’s regional transaction banking technology platform this year and next, and recruiting a further 50 sales people in Asia-Pacific.
Despite his positive growth projections, Veyres is careful not to underplay the challenges of doing business here. “While the risk-reward in North America is very clinical as to what pricing you get for what type of asset, in the banking business in Asia-Pacific the behaviour of the buyer and the impact on pricing is a bit different, and the relationship is much more important,” he said. “And though Asia-Pacific is a very attractive market in terms of growth and the trade flows are huge, on the other hand the immediate returns you can expect in Asia are lower than in other parts of the world. The challenge for large international banks is to find the right balance between investments, acceleration, and return on capital.”
How best to do this? Veyres acknowledges that many banks offer similar trade finance products, but believes that his bank has an edge in technology and product innovations, including its inventory financing services, partly thanks to a team of 200 product developers. But he identifies supply chain finance as a main driver underpinning the bank’s regional growth, simply because major corporations are paying more attention to their suppliers as interest rates rise and liquidity tightens. “This [tightening liquidity] has remained a challenge to some extent in 2010, so both MNCs and large local corporates are trying to ensure that their suppliers can manage the execution of their orders. We are seeing a big push from many corporations in terms of supplier financing, payables programmes and receivables financing. It boils down to injecting liquidity into the supply chain.”
Competition knocks
If Veyres is understandably confident about his bank’s trade finance prospects in the region, other banks are too, including local and regional banks, which all seem to either be beefing up existing operations or aggressively launching new services. “What local banks don’t necessarily have is global reach, nor sometimes do they have the balance sheet or long-term relationships with MNCs. But from a purely domestic perspective they can really be quite effective. The market has really changed a lot.”
And just as local and regional banks are more capable, local companies are likewise asking for much more sophisticated products and services. According to Veyres, demand from BNP Paribas’s regional clients for trade finance services are now almost on a par with multinational companies, though there are still differences. The bank’s Asian client base manifests similar behaviour and expectations to European and US firms, while better technological has made banking in the region a very similar experience to what could be expected in other regions.
However, what differentiates Asia-Pacific from the US and Europe, from both a corporate and banking perspectives, are the sometimes very different regulatory frameworks. Aside from a handful of markets including Hong Kong and Singapore, most countries in the region are highly regulated regarding flows of cross-border cash and trade, which can complicate life for trade finance bankers.“On the one hand, market expectations are very similar in terms of technology and structuring compared to Europe and the US. On the other hand, regulatory frameworks in this region differ a lot.”
Another exciting development is the renminbi’s emergence as a trade settlement currency. While undoubtedly of huge significance, Veyres believes that the practical difficulties companies encounter when adopting the new trade settlement currency are sometimes underestimated. Larger and more complex organisations need to reorganise a variety of processes before they can change their business patterns, including aligning procurement and accounting processes with various stakeholder groups and suppliers.
“A number of corporates have not adopted renminbi yet because it’s new and they need to adjust. The business behaviour between buyers and sellers has to change first, which takes time. This is more of a factor in why some corporates are not signed up to the renminbi as a trade settlement currency than a lack of renminbi-denominated investment products at the moment,” he said. For example, if a Western buyer wants to deal in renminbi, it will first have to talk to its Chinese suppliers, and will also have to hedge itself against any further appreciation of the renminbi. “In a nutshell, there are several elements which are very real, and whilst the story looks very interesting on the surface, it takes a little bit of time to implement it.”
So trade finance may well be one of the most attractive businesses for transaction banks in the region right now, but regulatory hurdles and fierce competition for business means that the likes of BNP Paribas will be taking nothing for granted.
This story was first published in the Trade Finance yearbook supplement to the April 2011 issue of FinanceAsia magazine.
