Companies Eye Impact of New Bank Regs on Trade Finance
November 8, 2012
Deutsche Bank and BNP Paribas Named 2012 Greenwich Leaders in European Trade Finance
Add one more item to the list of things for European companies to worry about as they try to revitalize their businesses in a challenging economy: A potential increase in the price of trade finance.
Eighty percent of the 300 financial officers from large European companies taking part in Greenwich Associates’ 2012 European Trade Finance Study — and nine out of 10 from companies in the FT 500 — expect pricing on trade finance products and services to increase as a result of the implementation of Basel III.
“In light of the funding and capitalization issues facing European banks, large companies are not only concerned about pricing on trade finance services, they are also keeping an eye on banks’ shrinking risk appetite and the availability of trade finance in their important markets,” says Greenwich Associates consultant Dr. Tobias Miarka.
European companies use trade finance products such as guarantees, import/export finance and open account finance first and foremost as a means of mitigating individual counterparty risks and exposures. Reflecting cross-border trade flows, European companies use trade finance most often for transactions in Western Europe and the Asia-Pacific region. Sixty-four percent of large European companies use these products and services for deals within Western Europe and 62% use them for Asia- Pacific transactions. Business in Asia accounts for nearly 20% of the bank fees paid by European companies for trade finance, with domestic transactions accounting for nearly a quarter and business in other Western European countries making up 21%.
Within the FT 500, approximately 70% of companies use trade finance for business in Asia-Pacific. Transactions from that region account for 26% of the total fees FT 500 companies pay banks for trade finance products and services, which tops the 13% spent in their own domestic markets and the 17% spent in Western Europe.
Regional Banks vs Global Competitors
Large European companies in need of trade finance rely mainly on strong regional providers, as opposed to global banks. However, that could change if global competitors set their sights on growing their presence in this expanding business.
“Competition between local and international banks in trade finance can still be characterized in part as price versus value-added,” explains Greenwich Associates consultant Dr. Tobias Miarka. “Generally, global banks compete less on pricing and the flexibility of covenants and more on the value companies can derive from their international networks, high-quality documentation and innovative ideas.”
European companies’ traditional preference for regional providers spans both their domestic and international trade finance needs. In the future, however, this situation could provide ripe opportunities for global banks to duplicate the success they have had in Asia, where they have leveraged international cash management relationships to win trade finance business. Already, about one-third of the large European companies participating in the Greenwich Associates 2012 European Large Corporate Trade Finance Study say they plan to increase the share of trade finance business they do with Europe’s top five banks.
Deutsche Bank and BNP Paribas each are used for trade finance by roughly a quarter of large European companies, making them the most widely used providers on a pan-European basis. Large European companies perceive Deutsche Bank as having a top-rated international network. HSBC, which is used by a quarter of companies with business exposure in Asia, derives strength from its robust Asia-Pacific network.
“Success at this level requires banks to be among the top five competitors in most, if not all, major European country markets,” says Greenwich Associates consultant Markus Ohlig. At the country level, however, the strength of domestic and local banks becomes clear. Two examples: Commerzbank and Deutsche Bank tie for first place in German market penetration and Nordea leads all competitors in both market penetration and quality in the Nordic region.