What trends are you seeing in trade finance and structured trade, and how is Citi adapting its strategy accordingly?
The key focus of our clients has been to find ways to move fixed costs to variable costs through the outsourcing of non-core activities, such as accounts payable, accounts receivables, certain trade processes as well as middle and back office processing, to firms such as Citi. In addition, the focus on gaining visibility and transparency into a company’s liquidity regionally and globally is critically important. We have been working with our clients to bring the required visibility and transparency through our various liquidity platforms, such as Treasury Vision, and our liquidity structures help aggregate and invest this liquidity to maximise its value for the company.
Additionally, our entire process around intermediating commercial flows is not so much around any one product such as structured trade, nor around trade finance, but around working capital. The conversations we are having with CFOs and treasurers focus on how we can improve days’ sales outstanding and days’ payables outstanding. We have a great deal of information about who our clients are supplying to and buying from, and are tying together the financing, liquidity, FX, receivables and payments in a very integrated set of capabilities for our clients to create an end-to-end set of working capital solutions. A few years ago we integrated our cash management and trade businesses into a single business we call treasury and trade solutions.
These conversations we are having with CFOs are very different from the conversations we were having two or three years ago. But our strategy is working. Overall, our assets on the trade finance side have increased by 50% since the beginning of the year. We have also seen tremendous growth in our export and agency finance business and our trade finance business is up 21% year on year. This growth is at least partly due to our integrated approach.
Are you seeing any other trends?
We are also seeing a clear move towards digitisation and away from paper-based transactions. For instance, we are working with some of the big beverage companies in Korea and China to use mobile technology to collect both information and funds from their distributors. The distributors make payments over the mobile phone, which allows our clients to close accounts receivables, open up the sales process, and improve their working capital management.
The other important trend is our focus on urbanisation. Today more than 50% of the world’s population live in urban centres, during the next the next 20 to 30 years that is expected to grow to nearly 75%. We have a clear focus on the public sector under our Citi 4 Cities program. There is also greater appetite for many of these public sector entities to work with international banks like Citi who can bring them value-added solutions from retail to transaction banking products. We have developed excellent partnerships across the region, with various public sector entities providing a wide range of services, including procurement/T&E cards, stored value cards, pension and social welfare benefits payments, on line tax payments infrastructure, transit cards, as well as securities and funds services.
What is Citi’s take on emerging trends such as intra-Asian trade and commodity financing?
If you look at the statistics, more than 50% of the world’s trade is intra-Asian, and GDP growth in this part of the world is very impressive. China is now the second largest economy globally, the largest manufacturing centre, and the largest market for automobiles, so there is clear growth in the middle class. During the next 15 to 20 years we expect the Asian middle class to reach nearly 1.5 billion people; hence we will see a marked rise in consumption and less reliance on OECD markets for growth.
Our focus is to identify the major commercial and capital flows and where our clients are expanding from local, to regional to global companies and help them in this journey. We are very focused on the various flows, such as commodities, and are working hard to connect clients across this region, as well as focused on trade flows between Asia and Africa, Brazil, and other markets around the globe.
Do you see any significant return to letters of credit (LC) as a trade finance instrument in the region?
I wouldn’t say there has been much of a re-emergence in the LC business. That said, our LC business has always been good for us, but our open account business is far more prevalent. I would say that our LCs are either relatively steady or perhaps even declining, but our open account business is increasing exponentially. Along with our export agency business, our trade finance business is our fastest growing business.
A modern supply chain requires detailed understanding of clients’ suppliers and distributors. How does a bank go about developing this end-to-end understanding?
We have long-standing relationships with a large percentage of emerging market and OECD buyers and work with them to understand their end-to-end supply chain, including their suppliers and distributors. Through our SME/MME business we also have a great understanding of the supplier and distributor side of the supply chain equation.
Additionally, we have a tremendous amount of client data on our own systems, and this provides us great insight into developing the understanding of the end-to-end supply chain. There are also robust credit and risk processes and evaluation systems. We also have a very strong profile in the local corporate business throughout the region and continue to grow our presence.
What is Citi’s strategy to capture some of the region’s SME trade finance market, given these companies’ close relationships with local banks?
We recognise where our strengths are and we know that we can never intermediate all of these flows on our own, so our strategy is to work with partners in the different markets. Where it is possible, we will always look to leverage our own network, our own relationships on the buy and the supply side. We are having strategic dialogues with partner banks in the region to create systems around the end-to-end supply chain space, where we would leverage each other’s knowledge of the clients, the markets, where our strengths complement each other and as, we did with Westpac in Australia, create a win-win supply chain solution.
Historically, our bank business was based on the traditional correspondent banking model, but our emphasis is now on both traditional correspondent banking and we have been developing strategic partnerships with banks regionally and on a global basis. We have hundreds of banking partners in Asia, and we recognise that there will always be areas where we compete with each other but also where we can partner up and create long-term mutually beneficial strategic partnerships. Citi provides its services to another bank to on-sell to its own client base on a white label basis, leveraging on Citi’s network in over 100 countries and our technology and infrastructure. In return we leverage on our partner bank’s extensive local presence. You can’t do this with 500 clients of course, but you can pick half a dozen to a dozen clients and really do it well.