RESULTS AND FURTHER READING
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There was a big rise in the number of respondents to Euromoney’s Trade Finance Survey 2024 who received an increase in credit from their trade banks last year – 45.7%, up from 41.8% in 2023. -
Some 50.6% of respondents to this year’s Euromoney Trade Finance Survey say the cost of credit from their trade banks has increased over the past 12 months, compared with 45.4% in 2023.
Demand for trade finance can be expected to return this year on the back of renewed market optimism. Anticipated interest rate cuts in the second half of the year should bolster trade finance loan recovery as lower rates enhance the appeal of financing options, encouraging companies to leverage trade finance for their operational needs and to fund expansion, according to Sriram Muthukrishnan, group head of global transaction services product management at DBS.
He adds that logistics, shipping and operational resiliency continue to remain areas of concern for businesses.
“As such, global supply-chain adjustments should continue at a conservative pace, providing a tailwind for trade financing as these adjustments are often costly and complex,” he says. “Global trade flows are shifting as importers diversify away from China to alternative suppliers and manufacturing bases in countries like Vietnam, India and Mexico.”
Legislative developments such as the US CHIPS and Science Act and the Inflation Reduction Act are further motivation for strategic industries – including semiconductors and renewables – to consider reshoring production. All these developments have resulted in rising business investment in new markets and high-tech manufacturing structures, which will continue to grow.
Other solutions
The need to optimise working capital in a higher interest-rate environment as well as reshoring projects and political and economic uncertainty are driving demand for trade-finance products to mitigate risk and secure strategic sourcing.
Mencía Bobo, global head of trade and working-capital solutions at Santander CIB, refers to particularly strong interest in inventory finance and other solutions, such as prepayments, to secure strategic supplies.
“Disruption in the Suez and Panama canals and other issues affecting global supply chains have affected the level of complexity and sophistication corporates require from trade-finance solutions as they shift away from just-in-time inventory management strategies to avoid supply-chain disruptions,” she says.
Kai Fehr, global head, trade and working capital, at Standard Chartered, also refers to a move to just-in-case supply chains.
“Interruptions prolonged the working-capital cycles of companies and led to an increase in demand for working-capital, payables, receivables and inventory-finance solutions,” he says.
Javier Sanchez, global head of global trade finance at Crédit Agricole CIB, is also confident that we will continue to see supply-chain disruptions caused by geopolitical tensions, natural disasters or logistical challenges.
Robert Konrad, head of group transaction banking at Erste Group, says: “New supply chains are being implemented, with alternative and diversified supply chains being a key focus for many corporations. We see increasing demand for guarantees to secure trade flows and services. In addition, trade finance-related financing opportunities are highly in demand as they are being used to optimise liquidity at the same time as prices for goods and commodities have risen.”
Dollar support
For 2024, the Fed has indicated that rates will likely be cut and with it, the cost of credit should go down, which could increase volumes and financing requirements, suggests Joon Kim, managing director global head trade finance, working capital and portfolio management at BNY Mellon Treasury Services.
“Given that the majority of trade financing worldwide is denominated in US dollars, we believe this will likely lead to an uptick in trade financing support across the year,” he adds.
Kim refers to an uptick in demand for trade outsourcing services, particularly to US regional and international banks. These solutions are designed to help clients avoid the high costs of contracting with third parties and address concerns about constrained trade staff resources or loss of key subject matter expertise.
According to Vivek Ramachandran, global head of global trade and receivables finance at HSBC, expectations of increased use of trade finance over the next 12 months may not be entirely realistic in light of disruption to the world’s main shipping lanes.
“The US economy has held up well and there is a lot of hope about China bouncing back, so there is genuine optimism that we can avoid a downturn in most Western markets,” he adds.
A new set of trade instruments aimed at the services sector are emerging, particularly around contracts that companies are seeking to monetise or annuity revenue streams that they want to accelerate the cash flows from, which is a variant of receivables financing.
Ramachandran also refers to a growing number of companies emphasising incentives to decarbonize their supply chains.
“If we consider traditional instruments, letters of credit continue to be used and we are seeing a big push for digital trade loans,” he says.
Better structures
Many corporates, as they consider the composition of their debt profile, are opting to refinance some of that traditional corporate lending into trade-finance working-capital solutions because they are structured to better suit their funding and business requirements, suggests Joe Arena, head of trade finance at CBA.
Increased demand for trade-finance instruments in 2023 was mainly driven by counter-cyclical appetite for documentary credit as a risk mitigation strategy, suggests Francesca Nenci, global head of trade and correspondent banking at UniCredit.
“There has also been a notable trend of financial institutions pushing for regulatory developments that are needed to make the business sustainable,” she says. “We have seen the changes that we were able to secure on the credit conversion factor; now the regulation we are increasingly pushing for is around electronic bills of lading.”
Marie-Laure Gastellu, head of trade services, global transaction and payment services at Societe Generale, observes that for large corporates, guarantees remain relevant alternatives to cash collaterals and this will continue to be a strong driver of demand for trade-related guarantees, especially for investments around the energy transition and net-zero commitments.
Anthony van Vliet, head of product management trade – transaction services at ING, mentions extended payment terms as another factor encouraging companies to make greater use of trade-finance instruments and notes that while use of letters of credit has decreased, bank guarantee volumes are stable and there is rising demand for supply-chain finance solutions.
Hauke Burkhardt, head of corporate lending at Deutsche Bank, says: “If we look at the procurement of commodities – especially energy – it requires more and more hedging products when it comes to long-term offtake contracts, mitigating price volatility.
“When looking at securing long-term supply of raw materials, export credit agency financings have played and will continue to play a crucial role.”
Martina Zimmerl, head of the trade finance department at Raiffeisen Bank International, observes that sanctions risk and related measures made trade finance business more labour intensive in the Central Asian and Caucasus regions and India in 2023.
“We further saw consolidation with respect to multibank channels, although digital islands with limited connectivity between each other remained,” she says. “Customers haven’t yet made up their minds with respect to digital channel adoption, and adoption of electronic documents is also behind expectations, although expected to rise thanks to implementation of the [UN's] Model Law on Electronic Transferable Records.”
Zimmerl says guarantees and open-account solutions are proving particularly popular as the former are less affected by anti-money laundering guidelines since the instrument is less "qualified" for money laundering.
