Trade Finance Survey: Trade-bank credit is critical at a risky time

Francesca Nenci, global head of trade and correspondent banking at UniCredit, suggests 2022 should not be viewed as a ‘normal’ year because corporates were still strongly impacted by the pandemic.

“Naturally it took a little bit of time to understand the final impact of the pandemic on credit deterioration for corporates, so the increase seen in 2023 is more a return to previous levels,” she says.

Aggregate demand for trade was strong last year, but funded trade limits did not necessarily increase, according to Vivek Ramachandran, global head of global trade and receivables finance at HSBC.

“We like trade because it is an asset class that gives us visibility into use of funds, and we only do trade finance with existing clients,” he says. “We haven't had to squeeze lines because the book has been performing well, although the market data we have seen would suggest that overall outstandings on trade finance have gone down.”

Mencía Bobo, global head of trade and working capital solutions at Santander CIB, attributes increased credit availability partly to non-bank institutions entering the trade-finance arena, widening the pool of available lenders and enabling the scalability of existing facilities.

“Trade finance has always demonstrated less cyclical behaviour as the underlying transactions are directly linked to the real economy, so the impact of general market conditions is mitigated,” she explains. “In any case, if market conditions worsen, there are ways to reinforce structures and avoid the discontinuation of a facility.”

Hauke Burkhardt, head of corporate lending at Deutsche Bank, reckons that there is a willingness to support projects or undertakings, especially those related to economic transformation.

“There is high demand for risk capital to support innovative business models,” he says. “To make sure credit availability remains high or even increases despite rising political uncertainty, we need the full strength of not only banks’ balance sheets but also strong capital markets, in conjunction with targeted use of public funds.”

Marie-Laure Gastellu, head of trade services, global transaction and payment services at Societe Generale, says availability of credit in 2024 will be impacted by factors including elections in Taiwan, Europe and the US, as well as expectations for falls in US interest rates in the second half of the year that should start freeing up borrowing capacity.

In Europe, the European Central Bank’s January bank lending survey notes that euro area banks moderately tightened their credit standards for loans or credit lines to enterprises in the fourth quarter of 2023.

The survey authors suggest loan growth could remain subdued in the coming quarters, with banks expecting further net tightening of credit standards for the first quarter of 2024.

Banks’ risk perceptions were a driver of the tightening of credit standards. However, Robert Konrad, head of group transaction banking at Erste Group, reckons banks remain ready to provide support, especially in the case of longstanding partnerships.

Banks continue to support supply-chain financing programmes that holistically support working-capital requirements and help to bridge the trade-financing gap, agrees Sriram Muthukrishnan, group head of global transaction services product management at DBS.

“Our supply-chain finance book remained resilient across 2023 as we continued to provide financing to customers where supply-chain linkages remained strong,” he says, adding that strong banks in the region remain well-capitalized and liquid, and are committed to supporting demand for credit so long as it is supported by sound financial principles.

To provide the higher levels of trade finance needed in the current environment, one emerging trend is for banks to offset credit constraints by collaborating and enhancing the options available, including via the distribution and purchase of trade-finance assets on the secondary market.

“As the demand for credit rises, distributing these assets helps to create additional capacity for trade financing,” explains Joon Kim, managing director global head trade finance, working capital and portfolio management at BNY Mellon Treasury Services.

Martina Zimmerl, head of the trade finance department at Raiffeisen Bank International, refers to a time lag between limit needs of customers and the implementation of new lines or increases to existing lines by banks.

“Commodity players’ credit lines were increased towards the end of 2022, but were not sufficiently utilized last year due to the decrease in commodity prices,” she says. “On the manufacturing side, the increases we signed were mainly due to higher share of wallet. In addition, some trade-finance banks exited the market in commodities, and in other cases corporates reduced the number of banks.”

With many corporates parking capex due to the high interest-rate environment and lower demand, Zimmerl expects banks to fight for the utilization of limits for highly rated corporates.

“In the case of corporates that are not adequately financed, availability of credit will be restricted,” she concludes.

While longer working-capital cycles triggered increased demand for working-capital, receivables, payables and inventory-finance solutions, the widening trade-finance gap shows that this finance likely went to the most resilient companies with the best credit quality and the lowest risk, acknowledges Kai Fehr, global head trade and working capital at Standard Chartered.

When asked how availability of credit will be impacted by uncertainty over interest-rate movements and geopolitical uncertainty over the coming months, he notes that in the current high rate environment many companies might consider postponing their large capex financing until rates start going down again.