Crunch, crunch, it's not so bad

Thomas DuCharme of Deutsche Bank takes a look at the credit crisis and what it means for transaction banking in Asia.
Thomas DuCharme, regional head of global transaction banking at Deutsche Bank, talks to FinanceAsia about the impact of recent events on transaction banking.

The credit crisis has put the investment banking industry under the spotlight. What has been the impact on transaction banking in the region?
At a high level, the credit crisis has reinforced the view that transaction banking is a solid and stable component of banks. During a period in which the capital markets and trading businesses of some of the worldÆs leading investment banks are facing significant problems, the momentum for the transaction banking business is still very strong. In Asia, this is a function of the continuing growth story among market participants. That has definitely been the key driver.

Despite the global credit crunch, Asian economies are generally buoyant and therefore offer players the potential to generate more business. However, we need to consider the other factors such as escalating oil prices and inflation across the markets today.

Has the credit crisis had any ramifications for specific business areas within transaction banking?
Beneath the ôstable shipö stereotype, there is actually a very dynamic story emerging in the individual transaction businesses in the region. In fact, I would say the past six months has been one of the most interesting periods I have witnessed in Asia. The credit crisis has actually changed the operating environment for all our businesses û trade finance, cash management and securities services û in fundamental ways. In the process itÆs created some of the strongest opportunities û in terms of the competitive landscape û I have seen for some time.

If the operating environment has changed what businesses are you seeing this in?
Trade finance is definitely the area most affected by the credit crisis, and we are already seeing this at both the banking and client level. On the banking side, we are seeing the impact on some of the larger banks that have been harder hit by the credit crisis û that is, their appetite for taking risk (lending money) along various parts of the credit curve has diminished.

It's possible that companies now faced with an increased cost of funding may also start to scrutinise trade finance plans, in the belief that a better funding environment might be around the corner. We are not seeing this yet on any great scale, which is good because I think companies that do hold off in the hope of better credit pricing might be disappointed. Most market experts agree that credit markets arenÆt likely to recover to pre-subprime levels soon.

What does this new environment mean for industry players in trade finance?
I expect a shift in the competitive landscape in trade finance over the next few years. I think it's fair to say that some investment banks will be looking at their balance sheet exposure and will not look to grow so aggressively in certain segments. There are also pressures in terms of the level of pricing people are prepared to offer û some institutions are facing an increased cost of funding themselves, so they potentially face a margin squeeze if they are looking to carry out the same kind of business.

What about cash management û how important is this business for banks during tough times?
Cash management is one of the largest businesses for the regional transaction banks and its significance cannot be underestimated. Aside from providing a solid annuity-type revenue stream for investment banks, the cash management business also results in significant deposits being placed with a bank, which are in effect an efficient source of funding. In short, cash management is a very good business to have if the environment for investment banking changes.

Has the credit crisis in itself created any challenges for cash management?
Not directly, but the policy response to the broader credit crisis has led US interest rates to fall, and has also put pressure on the US dollar. Both factors are challenges for the international transaction banks with falling yields on deposits. The overall value of deposits is also less in euro or pound terms.

For us, these impacts have been insignificant. The increase Deutsche Bank has experienced in terms of new clients, and increases in the number of transactions for existing clients, has more than offset such challenges.

Deutsche Bank is quite a large player in local custody markets. What have the conditions been like for that business?
The credit crisis, and recent volatility in regional equity and credit markets, has seen tremendous fluctuations in transaction volumes and the balance of funds deposited with custodians across the region. In terms of transaction volumes, we have seen periods of increased investment by international and domestic investors û who have increased asset allocation to Asia û and weÆve also seen periods in which investors have rapidly withdrawn funds in the belief that asset prices might stay depressed. So itÆs been volatile. Existing client assets though are also generally lower due to the deterioration in equity and fixed-income markets.

Generally, as revenues related to the custody business are also transaction based, we have yet to see a substantial impact on industry revenues in custody in Asia. In terms of our own business, weÆre winning some good mandates and so again itÆs been a positive period.

What is Deutsche Bank doing to capitalise on the competitive opportunities it sees?
Our transaction banking business in Asia is in growth mode, so we are investing aggressively and are looking to take market share from incumbents û some of which face significant global challenges. To put this growth into perspective, we increased headcount by more than 25% in Asia last year. In a period in which the overall environment may become tougher, weÆre still very confident of strong growth over the coming years.
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