Study Shows Companies Expect Regulation to Impact on Trade Finance Costs

European companies expect pricing on trade finance products and services to increase as a result of the implementation of Basel III, according to a study issued by market researcher Greenwich Associates.

Eighty percent of the 300 chief financial officers (CFOs) from large European companies who participated in its ‘2012 European Trade Finance Study’- and nine out of 10 from companies in the FT 500 – anticipate that the new regime will push up the cost.

“In light of the funding and capitalisation issues facing European banks, large companies are not only concerned about pricing on trade finance services, they are also keeping an eye on banks’ shrinking risk appetite and the availability of trade finance in their important markets,” said  Greenwich Associates consultant, Dr Tobias Miarka.

European companies use trade finance products such as guarantees, import/export finance and open account finance first and foremost as a means of mitigating individual counterparty risks and exposures. Reflecting cross-border trade flows, they employ trade finance most often for transactions in western Europe and the Asia-Pacific region.

Sixty-four percent of large European companies use these products and services for deals within western Europe and 62% use them for Asia-Pacific transactions. Business in Asia accounts for nearly 20% of the bank fees paid by European companies for trade finance, with domestic transactions accounting for nearly a quarter and business in other western European countries making up 21%.

Within the FT 500, approximately 70% of companies use trade finance for business in Asia-Pacific. Transactions from that region account for 26% of the total fees FT 500 companies pay banks for trade finance products and services, which tops the 13% spent in their own domestic markets and the 17% spent in western Europe.

Large European companies in need of trade finance rely mainly on strong regional providers, as opposed to global banks. However, that could change if global competitors set their sights on growing their presence in this expanding business.

“Competition between local and international banks in trade finance can still be characterised in part as price versus value-added,” said Miarka. “Generally, global banks compete less on pricing and the flexibility of covenants and more on the value companies can derive from their international networks, high-quality documentation and innovative ideas.”

The study also finds that Deutsche Bank and BNP Paribas each are used for trade finance by roughly a quarter of large European companies, making them the most widely-used providers on a pan-European basis. Large European companies perceive Deutsche Bank as having a top-rated international network. HSBC, which is used by a quarter of companies with business exposure in Asia, derives strength from its robust Asia-Pacific network.

“Success at this level requires banks to be among the top five competitors in most, if not all, major European country markets,” said Greenwich Associates consultant, Markus Ohlig. However the study suggests that, at the country level, the strength of domestic and local banks becomes clear.

Commerzbank and Deutsche Bank tie for first place in German market penetration and Nordea leads competitors in both market penetration and quality in the Nordic region.

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