American psyche

TFR asked trade heads at the three leading US trade and export finance banks to talk about the state of the market – about aggression emerging market blips technology and margins.

Respondents:

Citibank: Maureen Sullivan
North American Trade Head

FleetBoston: Hugo Owen
Senior Vice-President Global Trade

Bank of America: Frank Abraham
Executive Vice-President Global Trade Services

Do US banks approach the market differently from European banks?

Bank of America: The approach is generally the same since we’re all dealing with international companies affected by the same regional economies and the industry trends within them. That said however European banks face their own set of unique challenges within the context of their political and economic environments. Each of the separate local European environments are of course quite different from the operating environment of the US banks.

European banks should begin benefiting from the fact that the European economy is in good shape to withstand the non-European relative economic weaknesses that may result in 2001. Although Europe’s cyclical rebound is beginning to moderate its GDP growth is now outpacing US growth the European Central Bank’s monetary policy is more accommodative than the US Fed’s and the turn toward the euro appreciation and lower oil prices will serve to reduce their inflation. Meanwhile the gradual restructuring in the private sector continues to improve the region’s structural inefficiencies. The economies of non-core European nations including Spain Portugal the Netherlands and Ireland continue to outperform their larger neighbours. The widespread economic growth is creating greater local opportunity for European banks.

Citibank: Distinctions are drawn between those banks that have a clear long-term global trade strategy and those that do not. Currently there are a handful of global players both European and US banks who have taken a long-term strategic view of how they want to structure themselves and how best to serve their clients. Internally they are aligned to offer a complete and sophisticated range of financing facilities to support their customers’ business activities.

FleetBoston: To a degree yes. For example the trade and export finance disciplines in US banks have often been organised close to the cash management areas whereas the trade areas in European banks tend to be found closer to the lending functions. The objectives or actual activities are not really that different but the perspective or approach is consequently somewhat different.

Are US trade banks under further threat from acquisitive foreign buyers/merger partners (such as Bankers Trust and Deutsche etc)?

Citibank: US trade banks are not necessarily under further threat from acquisitive foreign buyers/merger partners however they must keep up with the competitive landscape. In order to remain on their own US trade banks must think ahead. They should have a multi-year strategic view of how they will implement their trade strategies. They must also carefully plan the allocation of resources and determine the scope required to remain (or become) a primary trade finance provider. Their major advantage will be the ability to provide a supporting range of cash management and foreign exchange services fully integrated with a broad trade finance offering.

Bank of America: Since all US banks are not created equal that is a hard question to answer in general terms. One has to look at any bank on a case-by-case basis. The most common flags that a bank may become vulnerable to a merger or acquisition would be to have a low undervalued stock price and excess uninvested cash balances. Or that they’re in some obvious financial turmoil from which their own recovery may be unattainable without the injection of new money and in many cases new leadership from an outside company.

Is your bank aggressive enough in certain markets or is there room for more risk-taking?

FleetBoston: In our case we are taking and want to continue taking what we consider to be reasonable risks. By reasonable risks we mean limiting ourselves to those markets with which we are familiar such as those in Latin America and Asia where we have been active for many years working with counterparties we know well and using transaction structures we have thoroughly researched.

Bank of America: We believe we have positioned ourselves with an appropriate international strategy that allows us to serve our client’s trade finance needs in all countries that are most important to their international trade efforts. Furthermore in today’s economic climate it is not a time to be moving further out on the risk curve.

Citibank: Citibank is no more or less aggressive in certain markets than any other bank. Aside from variations in individual markets at particular points in time no specific nationality of bank has been generally more or less aggressive than others over an extended period.

Which countries are basically off limits because they do not pay enough in margins but would be an acceptable risk?

Bank of America: This is an interesting question but we don’t think this way. If the country and business risk is acceptable we will be there to serve our client’s needs. However we won’t always get all of the business simply because the nature of competition and the freedom to set competitive pricing means that we will win some and lose some opportunities. However this does not keep us from continuing to compete in any one country.

FleetBoston: We cannot go simply for margin. Several markets for example in the former Soviet Union and in parts of Africa are closed to us due to our unfamiliarity with them and despite the attractiveness of their margins.

Citibank: As noted above we conduct business with customers on every continent of the globe. Market conditions are dependent upon a number of factors and may be subject to frequent change. Citibank assesses its opportunities in light of our customer relationships our overall risk profile and desired financial returns and our capabilities in individual markets.

Would you welcome some kind of emerging market blip to send margins upward at this moment?

FleetBoston: No. Of course there are times when the capital and financing markets misprice risks. And such periods often bring their corollary for example a period of under-pricing followed by an event of overshooting. But while we of course try to anticipate and prepare for such events we cannot welcome them; they may bring a return to more rational pricing but they also do considerable damage. We don’t welcome events of this nature because looking at this from our trade and export finance perspective we are by definition long all of the markets where we are active where we intend to remain with our customers for the long term.

Bank of America: Of course not. We want to see the emerging markets continue to develop sound and growing economies and stable governments. In the long run this creates a healthier arena for us to serve our clients and grow our business. We do not believe in short-term gains at the expense of long-term development of financially stable markets.

How do you see the trade and export finance market faring this year in light of interest rates various economies hovering uncertainly on the edge and general market appetite?

Citibank: Trade and export finance should fare well in the market this year. Globalisation has increased the trade knowledge and expertise of both exporters and importers. At the same time as it is presenting new opportunities. There is a general trend among larger companies with perhaps more creditworthy customers to move toward open account dealings. This is indicative of their comfort with cross border trade transactions. Even past market crises and economic instabilities have not reversed the gradual decline in the usage of traditional trade documentary services. With real-time information on trade transactions now available virtually anywhere in the world exporters (in general) are more willing to deal on open account.

Bank of America: We agree that there are a lot of economic factors at play in the markets this year but the trade finance business will have another solid year in 2001. The ups and downs of the various markets will have a tendency to offset one another so that the volumes around the world should be close to last year.

As the largest economy in the world the current deceleration in US economic growth is putting a damper on emerging nations that export heavily to the US and rely heavily on US financial institutions as a source of capital. Most large healthy nations have relatively self-sustaining economies diversified exporters and deep capital markets that soften the effects of US economic weakness.

The global economy is in a better position to absorb this year’s US economic weakness than in past years. European economies are growing at a healthy pace. Many emerging nations have begun to implement pro-growth policies and have adopted floating exchange rates reduced structural fiscal deficits and taken other steps to lessen their vulnerability. The recent decline in oil prices eases the potential burden of US economic weakness on the world economy. Nevertheless troublesome economic conditions are scattered around the globe and those parts of the world would certainly approach trade with a very different mentality than we do.

FleetBoston: We are very positive about our businesses this year. There are two parts to this. First the external factors to which you have referred and to which we could add several more uncertainties such as the price of oil of other commodities levels of capital spending of retail sales the sustainability of certain trade balances of certain currency exchange rates. We can’t control the external factors. But we can respond to them and that’s the other part of this: the internal factors how we are internally co-ordinated and positioned to meet the opportunities of a changing market. That is the source much of our positive outlook. We have come through our Fleet and Boston merger with a much stronger business more clearly focused on what we can and want to do and on how to go about getting there.

What do you think of bolero.net and other electronic systems? Is there too much hype and little actual substance to many of these?

FleetBoston: There are a great many needs out there and there are all sorts of electronic systems serving and responding those needs. Looking beyond the hype we feel there is a great deal of substance. If we begin with bank systems for electronic LC issuance these are proven and indispensable systems in particular for companies with high volumes of transactions. Our own such product TradeKey has been on our customers’ desktops via modem for many years. It is now accessible via the internet and we believe offers significant value. Second some LC issuance systems have expanded to serve as document preparation solutions. Third moving to your main question Bolero and the electronic messaging systems those vehicles may indeed now be coming into their own. They are wrapping products around their core messaging systems permitting better integration into a user’s back office system and they are attracting many new interested subscribers. Fourth there are the exchanges. Here the main issues revolve around how the banks will from a finance rather than a payments perspective interact with those who are transacting business on the exchanges given that the users will not necessarily be credit customers. Fifth perhaps we could add the debt trading exchanges in which the banks themselves would be among the principal users. We are interested in those sites and are observing them closely.

Bank of America: Global trade has long awaited major changes that will allow the paper exchange and settlement process to catch up with the digital speed of the internet or even catch up with the overnight speed of jetliners carrying goods. The desire to reduce reliance on paper-based manual processes has been in the minds of global traders and banks for decades. It’s no surprise that with the advent of the internet apparent opportunities to bring some of those preliminary ideals closer to reality are creating a lot of visibility now.

Like we’ve seen with a great majority of dotcom companies that started and failed over the past three years having a website and a name does not necessarily bring you customers. We know that a real value proposition one that the client can understand before investing must be present for the venture to succeed. What seems to be lacking from ventures like TradeCard is the clear delineation of the value proposition.

Another factor potentially impeding their success is that of critical mass. In order for the online ventures in international trade to be meaningful there must be participation by the majority of trading partners. If trading partners and their associated trade service providers in the supply chain are not linked into the same system no system value or improved efficiencies will be achieved. The electronic chain will be broken if certain partners are outside of the system requiring the traditional paper-based processes. Until that obvious hurdle is addressed by the new systems mainstream adoption will be very slow.

Citibank: Increasing use of the internet and the introduction of bolero.net and other electronic systems are driving the web-based evolution of this business. They provide greater standardisation of trade documentation and the elimination of market fragmentation supply chain inefficiencies and lack of transparency that were once inherent in the global trade process.

Citibank was one of the first global banks to enrol in bolero.net and has assumed a proactive role in this initiative. The bank was the first to conduct a live transaction across bolero.net engaging US retailing customer Federated Department Stores its supplier in Hong Kong the shipper (American President Lines) and freight forwarder Mercantile. We are conducting an expanded business pilot to prove this process globally.

How will such technological forces affect the role of the bank in trade finance? Could banks be threatened by such forces?

FleetBoston: Not only are companies accustomed to depositing funds with banks and to obtaining credit from banks but also in the reverse direction banks are very well prepared to continue in their traditional role of evaluating and extending credit. So in respect of credit-related activities such as trade finance banks hold a critical advantage but no barrier to entry. Therefore the banks are responding in many ways including forming alliances not only with other banks but also with the application vendors themselves such as with TradeCard for example.

Citibank: Together with the growth in world trade rapid advances in transport telecommunications and e-commerce technology are having enormous ramifications for how trade is conducted today.

Increasing use of the internet and the introduction of capabilities such as bolero.net are driving the evolution of the trade business. Accordingly the core trade documentation flows traditionally managed by banks are under threat. Greater competition for trade business within the banking industry has led to downward pressure on pricing at a time when new developments in banking technology and telecommunications demand heavy investment. The result is that a number of traditional trade banks have exited or are exiting this business due to a continuation of the consolidation trend in the industry.

Banks and specialised trade firms face particular challenges in determining their approach to these transforming market changes the advent of new competitors and shifting client needs.

Bank of America: Banks do need to look seriously at alternative means for delivery of trade services. The internet certainly affords us many advances enabling us to find and link with our customer base gaining efficiencies we haven’t seen before. Banks could be threatened by technological advances if they have not found and embraced new revenue opportunities therein. The paradigm is changing and all banks are being forced to reinvent their services in many ways. If your bank isn’t up to that task the world will certainly look like a threatening place.

Chase and Bank of New York declined to participate in this feature.