From the banks’ perspectives, 2014 did not bring about the much-anticipated recovery in trade finance margins despite risk issues in China taking a significant toll on liquidity. Letter of credit (L/C) volume from Chinese banks was down 15% to 20%, according to trade finance bankers, after fraud issues at the Qingdao and Penglai ports surfaced in May 2014. This is how the trade finance market in the region is looking as we continue The Asset’s 2015 Treasury, Trade and Risk Management Awards’ announcements.
The incident’s zenith was reached when ICBC launched an injunction against itself in a Chinese court in the late summer, in order not to honour an L/C it had issued itself.
The shock was so big that for a few weeks, other banks filled the void left by Chinese banks and priced up trade financing by nearly 20bp. Soon, though, most global and many regional banks became more cautious. Other banks were perplexed. Many shared the same feeling with Piyush Gupta, CEO of DBS, who commented in a call to investors: “Once a bank has accepted documents, no bank ever reneges." Some reviewed their portfolio of clients, particularly in the commodity space. Others took a more general approach by only issuing shorter-term L/Cs, which come at lower margins. At the same time, regional Southeast Asian as well as Japanese banks increased their risk appetite, further eroding margins.
Also stepping up: regional export credit agencies. The likes of the Japan Bank for International Cooperation (JBIC) and K-Sure are typically associated with very large facilities, securing the export of capital goods to countries and buyers with high credit risks. In 2014, there were plenty of these, including the K-Sure backed US$1.34 billion funding for eight LNG carriers to Greece’s Angelicoussis Shipping Group. Citi acted as global coordinator and sole bookrunner in the transaction.
Perhaps even more notable, though, are the roles that ECAs play in (relatively) smaller supply chain financing solutions. China’s Sinosure and China Export-Import Bank (Chexim) played important roles in financing such trade deals in 2014. Some highlights include the Sinosure-backed receivables purchase solution for China Huanqiu Contracting and Engineering and the Chexim-backed receivables financing solution for Zhenhua, both arranged by Standard Chartered.
With or without ECA involvement, non-traditional trade finance facilities are becoming more important revenue contributors to banks in the region. While nearly 80% of Asia’s imports and exports were traditionally financed by documentary trade instruments, including letters of credit and bank guarantees, open account trade is gaining traction throughout the region. Partly, this is driven by competitive pressures – buyers expect more accommodative payment terms and suppliers grant them so as not to lose business.
Open account trade business, which can take many shapes and may include factoring and forfaiting of account receivables, is growing at double digits for many banks in the region. For banks, they are revenue-generating activities that carry relatively low risks. Clients typically benefit from off-balance sheet financing, shorter cash conversion cycles and improved financial ratios that help when sourcing funding.
In 2014, the trend of corporate treasury becoming strategic advisers to the business as a whole continued. Many supply chain finance solutions were only made possible by the close collaboration with procurement and distribution departments within corporates.
Last year also witnessed a number of bank payment obligation (BPO) transactions, typically replacing the use of letters of credit. For commodity trader Shing Pak, CIMB worked with China’s CITIC Bank to structure Malaysia’s first cross-border BPO. Meanwhile in Thailand, Siam Commercial Bank successfully recommended the BPO instrument to Saksiam Group.
Still, the BPO hardly celebrated a breakthrough year in 2014. In fact, the electronic matching engine that underpins the BPO has found an interesting use in China, according to some bankers. A number of Chinese banks are apparently using the technology to facilitate inter-branch handling of L/Cs domestically, that is, when both issuing and advising banks are different branches of the same institution. It saves costs and replaces the need for a proprietary system. Whether it is in the spirit of Swift and the International Chamber of Commerce can be debated, though, especially if cost savings are not passed through to clients.
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