Think Globally, Act Regionally
Trade finance, as well as related bank-offered products and services, is the business end of globalisation. It converts the principles and aspirations of a sometimes intangible phenomenon into actual instruments to support realisable objectives. Yet, while a fantastic opportunity, globalisation also poses a challenge to the leading trade finance banks.
This small group of dominant players make the considerable investment required – in systems, IT, innovation and people – to serve a global customer base as it transacts with disparate clients and regimes, encountering a diverse range of needs and risks. The challenge for these banks is to structure themselves in a way that allows their global offering to be regionally, and even locally, relevant.
Certainly, globalisation is both a global and local phenomenon. Countries, and even entities within countries, are at different stages of development and therefore have different needs. Some need cash, some risk mitigation, some risk support. But all now need to be able to execute global transactions with counterparties that can seem exotic to each other. Being in tune with this process requires banks to think globally and act locally – or at least regionally.
Deutsche Bank tries to reflect this structurally by operating through a range of trade finance hubs – based on either local client requirements or local expertise.
An example of this is the bank’s Frankfurt headquarters, which has a specialist team focused on serving the bank’s German corporate and financial institution client base. This makes Frankfurt Deutsche Bank’s European hub for receivables finance – a specialisation that emerged from a tradition of forfaiting for the bank’s mid-tier German clients.
Forfaiting refers to receivables finance against a single export receivable – usually a letter of credit, which means taking bank risk. Around five years ago this evolved due to increasing demand in Germany for receivables finance – especially from midcap companies. We started looking at revolving facilities and whole portfolios, as well as domestic trade flows. We also started taking corporate, as well as bank, risk. In reality, we were adapting the forfaiting instrument to serve a client base that was developing a taste for a revised factoring offering – an area in which Germany appeared underserved in comparison to, for example, France and the UK.
In terms of volume at the bank, the corporate risk receivables business has now caught up with the traditional bank-risk forfaiting business. And the potential for the business is driving the bank’s ambitions in other hubs. For instance, while Frankfurt is the hub for receivables financing for German clients as well as neighbouring countries where the focus is on the favourable balance sheet treatment offered by receivables financing, the London receivables hub is also growing – this time being responsive to customer requests from the UK, Scandinavia, Netherlands and France that are looking more for an additional source of liquidity.
New York is another receivables financing hub, again based on local or regional demand. However, in this case, the bank helped create the demand. We adapted the factoring product into a highly structured form that appealed to both US and Latin American lower and higher credit borrowers. The key attractions with the receivables product remained the same, no matter who the borrowers – that it could beat traditional financing on price and that it received favourable balance sheet treatment.
While much of the world is converting to open account trading – rendering documentary credits less central as a trade financing technique – many Asian countries and corporates prefer using risk mitigation techniques to support their extraordinary growth in trade.
We step in where structured trade finance solutions can add value to our clients’ requirements. Whether it is by providing warehouse financing, structured commodity finance, structured receivable finance or other structured trade finance solutions, the structured trade finance arena in Asia provides significant growth opportunities.
Another area of trade finance still thriving in Asia while becoming less prevalent elsewhere is ECA-backed lending. Singapore acts as Deutsche Bank’s regional hub. Asia is now a leading exporter of capital goods – often to emerging markets – and this remains a strong focus for export credits, despite their decline in prominence in the older industrialised world. China’s ECA, Sinosure, for instance, is a dynamic and growing export credit agency, and it is important that we have the capability of structured Sinosure-backed transactions.
Yet not all hubs follow local client needs – sometimes they follow the expertise. Deutsche Bank’s Amsterdam hub is focused on commodity finance, and has been since the bank’s 1970s purchase of commodity financier Albert de Bary. Indeed, prior to being folded into the Structured Trade and Export Finance unit in the late 1990s, the Amsterdam commodities team operated as Deutsche Bank de Bary, with much of the commodity financing expertise still residing there.
Certainly, when offering expertise-based financing products it makes a lot of sense to have a centre of competence. Commodity finance is a lumpy business – with large transactions that soak up a number of people prior to closing. These are expert teams that need to be together and remain fed, which makes their location in one place the natural solution.
Also, our aim is to pitch for agency roles in commodity finance, which means having the middle and back office to support this. A key role for the agent bank is being able to convert any volume of commodities being used as collateral for bank lending into a dollar value – thus giving the syndicate comfort regarding its security.
Deutsche Bank distributes the risk on a commodity finance transaction through its London hub – again a location based on local expertise, as well as critical mass. Certainly, the sheer number of banks and other investors located in London makes it the obvious place to locate the bank’s distribution team. In 2002, Deutsche Bank reorganised its distribution capability so that the trade finance assets – those dealing with emerging market risk – were separated from the general loan capital markets function. This is because we saw distribution as crucial to success in the trade finance market, and that it would therefore require a specialist dedicated team – though one where the main capability was in London for the European market.
It is important to have a global reach in today’s distribution market. Many of the investors for a Brazilian or Kazakhstan deal may come from Asia – just as there is a lot of interest in Europe for, say, Thai risk. This means that distribution centres around the world need a global, not simply a regional, perspective. By dividing our distribution teams along vertical asset classes, we ensure this. Our focus is not the regional distribution of a range of assets – but the global distribution of trade-related assets. It is an important difference in emphasis. Certainly London is a distribution hub, but in a globalised world it cannot simply be a regional one – and neither can Singapore or New York, or even Frankfurt.