Trade Finance Survey: Outlook hangs on rate cuts by year end

Lending margins in the UK have not gone up, but the overnight rate has – and that is what has driven the increase in the cost of credit referenced by many survey respondents, according to Vivek Ramachandran, global head of global trade and receivables finance at HSBC.

“If we look out to the remainder of this year, I think the curves would tell you that reference rates will come down towards the tail end of 2024,” he says. “So, from that perspective, the all-in cost of credit will also come down, and that will hopefully provide a little bit of impetus for companies to embark on new economic activity or expansion.”

Of course, this forecast is predicated on the overall macro risk environment remaining largely unchanged.

“If you look at dollar rates, the market expects at least one cut by the end of this year. I think that will be reflected in the overall cost of credit,” adds Ramachandran.

Marie-Laure Gastellu, head of trade services, global transaction and payment services at Societe Generale, says there is also price pressure due to strong competition between banks on some highly visible or creditworthy trade finance deals.

“Banks will be cautious on country and corporate risk profiles in a volatile environment with a risk of recession,” she adds. “A flight-to-quality strategy will be considered with a reassessment of limits across the board by segment and client type, which will also drive stronger competition on deals that are the most creditworthy.

"Banks will be looking to increase the proportion of high-quality assets with the view of facilitating risk distribution,” she adds.

Francesca Nenci, global head of trade and correspondent banking at UniCredit, does not expect a negative impact on credit availability over the coming months despite continued uncertainty around geopolitical and interest-rate developments.

But she is less confident about the cost of credit due to an expectation that interest rates will fall more slowly than predicted in some quarters.

“During 2022 and 2023 companies were still processing the impact of the Russian/Ukraine war on their supply chains,” she says. “What we are seeing in the Middle East is so far not comparable from this perspective, so we are in better shape than we were two years ago.”

Mencía Bobo, global head of trade and working-capital solutions at Santander CIB, says higher cost of credit can be mostly linked to increased perceived risk and tighter regulatory-capital requirements for banks. She too doesn’t expect any great rise in costs this year.

“The geopolitical situation is driving up risk costs in specific regions,” says Anthony van Vliet, head of product management trade – transaction services at ING. “We don’t expect the overall cost of credit to rise significantly this year, but in 2025 an uplift is expected due to the impact of Basel IV reforms.”

Robert Konrad, head of group transaction banking at Erste Group, acknowledges that a rising interest-rate environment has a direct impact on the cost of trade finance, in addition to more client-specific factors such as creditworthiness and collaterals.

As far as the capital markets are concerned, corporates’ refinancing costs will increase further in 2024. The average coupon of outstanding euro investment-grade corporate bonds is around 2% – with an average time to maturity of just over five and a half years – and the average yield is 3.7%.

“But one good thing here is that trade-finance tenors are normally short term, which means that when interest rates start to fall, trade finance will be one of the first business areas to profit from that pivot,” says Konrad.

The rise in the cost of credit will also be limited by the fact that only a certain amount of corporate indebtedness matures and will need to be refinanced this year.

Credit spreads have been tightening since the fourth quarter of 2023, so refinancing costs are lower and investor expectations that the central banks will lower rates in 2024 should have contributed decisively to the spread tightening.

Monitoring economic indicators, policy developments and market trends will be essential for assessing the trajectory of the cost of credit, observes Javier Sanchez, global head of global trade finance at Crédit Agricole CIB.

Sriram Muthukrishnan, group head of global transaction services product management at DBS says: “Efforts to democratise trade finance through alternative lending practices, digitization and the use of artificial intelligence for risk management contribute to the availability of credit.”

He refers to higher base interest rates in multiple jurisdictions and currencies, especially the US dollar, as a key reason for last year’s increase in the cost of trade credit.

“Our own experience – as well as market readings – indicates that the mark-up over cost of funds charged by banks remains compressed mainly due to lower demand for the better part of 2023.”

Martina Zimmerl, head of the trade finance department at Raiffeisen Bank International, expects the ECB rate cutting cycle to start in the second quarter of 2024, and for that reason does not anticipate a steep increase in the cost of credit this year.

“There will be rating downgrades at corporate level and higher risk cost will drive costs up for such clients,” she says. “However, I believe that the additional risk cost charged because of rating downgrades on average will be offset by the reference rate cuts.”