Banks Expect Trade Finance Revenue Growth In 2021

According to the recent forecast report made by the Coalition, the trade finance industry is expected to regain its stability in 2021 after experiencing almost a decade of diminished or constant revenues.

Coalition is an S&P Global-owned research company according to which the revenues have a scope of rising beyond the pre-pandemic levels as soon as in the coming year of 2022.

When it comes to the financial instruments of Trade Finance boosting companies’ imports and exports, the influencing providers across the world include HSBC Holdings PLC, Citigroup Inc., BNP Paribas SA, Standard Chartered PLC, and Deutsche Bank AG.

These positive revenue forecasts have come into the scene after an unstable year faced by global trade along with intermediaries who provided funds to it. Due to the lockdowns and travel limitations which were the resultants of a global pandemic, world merchandise trade is expected to decrease by 9.2% in 2020 as per the World Trade Organization prediction made in October.

These worldwide obstructions have affected traditional trade finance activities on a huge level, a report shown by Coalition and Greenwich Associates in September. The traditional trade finance instruments include letters of credit and guarantees.

Still, a part of overall trade finance decreased revenue was equalized by the boost of supply chain finance which shows a 4% increment over the year in the first half of 2020, as per the Coalition. Usually, a complete program of supply chain finance is established by the corporate purchaser with a bank or alternative supplier to make suppliers capable of getting early payment for their invoices.

A decrease of up to $49 billion in the total trade finance revenue collection for worldwide banks is expected in 2020 by the Coalition, from $53 billion in 2019. But in 2021, this is set to restructure to $52 billion according to the forecast. It means that it will touch $54 billion by 2022, above the pre-COVID pandemic level.

The foundation of the whole data is based on the assumption that the vaccine will be available in the market in the initial three months of 2021 to make the life return back to its normal routine throughout the year. As per Eric Li, research director at Coalition, in an interview.

The buzz about the vaccine in late 2020 also engenders Deutsche Bank to upgrade their perspective for trade finance along with Daniel Schmand, the bank's worldwide head of trade finance and lending, hoping that the trade finance will be restructured to pre-COVID levels by the middle of 2021.

He explained to S&P Global Market Intelligence his optimistic perspective towards Deutsche's revenues from trade finance to increase 5% to 10% in 2021 following stability in 2020. He adds that this form of finance will be a key factor in aiding economic recovery. Along with other targeted areas, he sees a good scope in supporting German suppliers of medical equipment, especially in emerging markets.

Higher Limitation:

On a surprising note, the huge influencer according to Li for the industrial revenue growth is not going to restructure trade volumes.

Although the WTO sees a 7.2% increase in the trade volumes in 2021, Li does not expect the bank’s willingness to grow its finance business at the same speed. This is somewhat the consequences of upcoming Basel III reforms, usually known as Basel IV, which is expected to compel higher capital requirements on banks' trade finance documents, especially in the case of lending to SMEs.

Preferably, the enhanced limitations on trade finance are expected to drive revenue growth, according to Li which has been in decay for at least the previous five years. Backed up by lower funding costs due to the low-interest rates, margins have started experiencing an increment in the second half of 2020 for banks, he adds.

Another key driver is the assumption of an extended dollar weakness, which can support the value of non-dollar trade, he explained.

As a result, even if the banks continue providing funding to the same trade volumes in 2021 like in 2020, the revenue for this industrial business has a scope of growing 3% to 4% conveniently, Li adds.

Cost Compulsion:

However, this type of revenue increase does not certainly stand for the fact that the banks will experience development in the main concern of their trade finance businesses.

Gianluca Romeo, a director in Fitch Ratings' bank's division, shows acknowledgment regarding the improvement in the trade finance revenues in 2021 and 2022 but adds that this overall improvement in the sector is expected to experience enforcements from growing costs, including possibly added-on investments in IT as well as an increase in the loan impairment charges.

The supply chain disturbances and a hike in the fraud activities during the pandemic may cause banks to increase their spendings on the various projects of digitization, he explained in an interview. For example, in Singapore, on Oct. 6, 2020, it was announced by Standard Chartered, DBS Group Holdings Ltd., and 12 other banks that they are cooperating to introduce a digital trade finance registry for providing aid towards reducing fraud activities who are looking for funding from different lenders for the similar trade inventory.

These types of investments can compel profitability in the short period but would provide positive results in the medium and longer-term, as per Romeo.

He additionally alerted that the genuine impact of the global pandemic on asset quality deterioration will turn out to be completely noticeable in the second half of 2021, given that most of the legal support packages and payment holidays will lapse in the initial three months of the year.