The UK’s relationship with Europe: Mapping a new course

With the UK voting to leave the European Union (EU), it is highly uncertain what the UK’s future will look like outside the EU. This makes the UK’s decision to leave the EU something of a ‘leap in the dark’ for many companies. But there are steps businesses can take in the coming weeks and months to manage the uncertainty, tackle the challenges and seize the opportunities that the UK’s decision to leave the EU presents. Lloyds Bank’s Adrian Walker, Head of Global Transaction Banking, tells us what a good post-outcome trade strategy might look like, and how the Bank plans to support its clients through these testing times.

What general challenges does the EU referendum result create for companies with respect to international trade?

Aside from the sharp fall in Sterling against other major currencies, the main challenge stemming from the referendum outcome for our clients is the considerable level of uncertainty they are now facing. As the political negotiations begin to unfold the picture will gradually become clear. Until we reach that point, there is limited clarity around the UK’s future relationship with the EU and its other trading partners. Key questions, including whether the UK will continue to have access to the single market or use the World Trade Organisation’s free trade agreements, remain unanswered.

In the meantime, it is important for companies to begin thinking about how they can de-risk their end-to-end value chains in order to manage this uncertainty. Regardless of how political negotiations develop, there will always be plenty of new opportunities ahead for UK businesses.

To what extent have you discussed the UK’s decision to leave the EU with your corporate clients? What are their key concerns?

As a relationship-led bank we maintain regular dialogue with our clients so it was natural for conversations to turn to the referendum in the days before and after the vote. But we have also approached the issue proactively. Our economists offered their insights into different scenarios prior to the referendum, and we have been in discussion with our clients about their strategies for managing the financial impacts and how we can support them with financial solutions.

Our clients’ concerns vary significantly depending on the nature of the underlying business mix, the size of the company in question, its complexity and geographical footprint. If there is one single issue that has been talked about across the board so far, it is the currency impact. The fall in Sterling following the referendum outcome is already giving rise to a wide range of impacts across end-to-end value chains. Companies in the UK that are sourcing goods, services and inputs of production from overseas have been the most heavily impacted, and many are smaller clients who might lack the internal resources to implement a sophisticated currency hedging strategy. Net importers are now looking to understand to what extent rising costs can be passed on to customers and how that might affect their competitiveness domestically and internationally. On the flip side, exporters are becoming more competitive, something equally important to consider.

With our long pedigree in supporting international trade, Lloyds Bank is well-placed to help clients mitigate the risks of buying and selling in new markets, and provide them with tools to minimise their working capital cost.

We also have clients, particularly within the construction and services management sectors, that are worried about how leaving the EU might impact their ability to source skilled labour from the EU. Were the UK to adopt more stringent border controls or, perhaps a points-based system, accessing that labour could become a challenge. These businesses will need to think about adapting their recruitment strategies going forward in order to minimise disruption.

While some specific consequences of the referendum outcome are now beginning to crystallise, it is probably the general uncertainty that is giving companies the biggest challenge at the present time. For those companies that regularly enter multi-year contracts with their buyer and supplier base this could prove more challenging for example. A contract signed today could become very unpalatable in the future, not least because of the underlying currency values.

Such uncertainties may weigh on trade over the long-term, but the immediate impact on trading conditions has so far been rather muted. A lot of our clients are telling us that their buying and selling relationships have returned to normal quite quickly – although we have seen a minor decrease in volumes across the clients we serve, possibly linked to an element of ‘wait and see’.

What role can Lloyds Bank play in helping clients face these different challenges and seizing the opportunities presented by the UK’s decision to leave the EU?

In the lead up to the referendum, Lloyds Bank focused on understanding the impacts of both possible outcomes for both the bank and our clients. Most important to us was ensuring we would be able to continue serving our clients even in a business environment characterised by considerable uncertainty. From our perspective, nothing fundamental has changed at this point. We are continuing to grow in the UK, but are also following our clients internationally through our overseas offices in the US, Europe and Asia. Lloyds Bank is still there for its clients as a solid banking partner over the long-term; we remain resolute in our determination to help our clients prosper globally.

With our long pedigree in supporting international trade, Lloyds Bank is well-placed to help clients mitigate the risks of buying and selling in new markets, and provide them with tools to minimise their working capital cost. We support a broad range of clients, from small-to-medium sized enterprises through to major global corporates and financial institutions. To meet clients’ needs, we have a similarly broad range of products, from simple documentary collections through to bespoke structured trade solutions. A good example of how we can help our clients is through the Letter of Credit (LC), which we are able to offer in over 90 countries through our international network of partner banks. The LC is a great tool because it can be used by the exporter as a source of risk mitigation and liquidity, but also by the importer to ensure supply performance.

How do you envisage your work with the Department for International Trade and International Chamber of Commerce will prepare businesses to meet possible arrangements for the UK leaving the EU?

In 2015, we became the first UK bank to enter into a strategic partnership with UK Trade and Investment (UKTI), now called the Department for International Trade (DIT). Under the terms of the five-year agreement, we will be supporting an additional 5,000 first-time exporters per year, every year. This target will help contribute to the UK government’s goal of helping 100,000 businesses start trading overseas by the end of the decade.

We added to this commitment in July 2016 by signing a memorandum of understanding (MoU) with DIT to work together on the development of a unique online database. This database matches importers and exporters to help UK businesses forge new relationships overseas. With the truly global reach DIT has through the Foreign and Commonwealth Office, the database has the potential to be a really useful tool for UK companies to link to contacts around the world. Another organisation we are also building a relationship with is the International Chamber of Commerce, which has a wide reach across the global economy. This is another resource that importers and exporters can use to support their international trading.

Lloyds Bank is entering into these partnerships principally because we recognise the importance of exporting for the British economy. Post-referendum, large and small UK businesses will increasingly need to look to overseas markets for growth opportunities. Encouraging more businesses to take advantage of the opportunities by looking to export to new markets should help to reverse the UK’s current account deficit, and help them to de-risk through accessing new revenue streams. The old adage rings truer than ever: with change comes opportunity.

What investments are being made by Lloyds Bank in the trade space – and how will these benefit clients going forward?

Increased investment in our digital capability is a strategic priority for the Bank. We are building a new processing platform which will process traditional trade instruments such as Letters of Credit, Guarantees and Documentary Collections and we are also investing in a new Supplier Finance platform. Recognising that corporate clients are increasingly telling us they want digital platforms that will enable them to operate in a multi-bank fashion, we are exploring how we open up our infrastructure to other multi-bank channel providers.

Encouraging more businesses to take advantage of the opportunities by looking to export to new markets should help to reverse the UK’s widening current account deficit, and help them to de-risk through accessing new revenue streams. The old adage rings truer than ever: with change comes opportunity.

This year we will also be launching a new International Trade Portal, through which businesses looking to import and export can identify new opportunities across the globe. This will allow a treasurer at a company that is expanding its overseas trading activities to find out exactly what the documentary requirements are, what the country looks like in terms of risk, and who they might be able to trade with in that country. Effectively, what we are doing is using our specialist knowledge and insight to create a rich picture of the business environment for our clients to use. And when one overlays that information with what is available on the DIT platform, we are left with a really powerful end-to-end offering for our clients.

Finally, what key advice would you give to corporates as they look to manage uncertainty created by the UK’s decision to leave the EU?

In the short term the UK will remain a member of the EU and will continue to trade business as usual. In our view our clients should use this transitional period to prepare for the future by considering ways to de-risk their value chains. Beyond the borders of the EU there are real opportunities for companies to trade internationally, particularly in some of the high-growth emerging markets. Now is the time for companies to start thinking about these opportunities and how they will manage the risks around importing and exporting into new markets.

How companies adapt to the challenges they now face will be key. For instance, a fall in the value of Sterling presents a significant risk management challenge for companies with international supply chains. However, if the company is also exporting internationally, it might see a net benefit from the fall in Sterling if it were able to find a way of sourcing more of its inputs domestically. Companies outside of the UK may need to be sensitive to the sharp increase in cost for British firms. Negotiating more favourable payment terms for their buyers may help ensure sustainability of the supply chain, and trade instruments are a great way to do this. These are the types of questions companies should be thinking about.

On the whole, our clients are responding positively to the referendum outcome. They are telling us that they are excited about the prospect of building their businesses in this new paradigm. And we will be there to help them on their journey of growth and diversification.