Perspectives

Bank Interview: Bank of America Merrill Lynch

Published: Apr 2013

What are the key trade issues for the coming year – and more importantly, how will they be managed? Global and Regional Heads of Trade from Bank of America Merrill Lynch engage with the topics that matter, providing insight for corporate treasurers the world over.

Bank of America Merrill Lynch

Portrait of Bruce Proctor

Bruce Proctor

Global Trade Head

Portrait of Kuresh Sarjan

Kuresh Sarjan

Trade Head of Asia

Portrait of Martin Knott

Martin Knott

Trade Head of EMEA

Portrait of Dennis Dubois

Dennis Dubois

Trade Head of Latin America

Portrait of Maureen Sullivan

Maureen Sullivan

Trade Head of North America

General outlook for 2013

There is still much financial uncertainty in the world. How has this affected each region’s trade flow and its place in the global trade arena?

Dennis Dubois – LatAm: There has been a lot of noise about the overheating of the markets in Latin America but we need to be cautious as it’s difficult to define because of the vast disparity between Latin American countries. In the case of Brazil, was it starting to overheat? Absolutely, but the government took steps to cool it down. However, with massive infrastructure projects being built for the World Cup and for the Olympics, as well as for badly needed infrastructure development, coupled with easier credit, the risk of overheating is real and needs to be carefully managed. Mexico has been ‘rediscovered’ by a lot of US companies which are looking to make new or expanded investments there, so it too could overheat. The same could be said of Colombia, and even Peru, to a lesser extent.

Martin Knott – EMEA: Our outlook on trade in EMEA remains positive, primarily predicated on forecasts from the WTO and projections that global trade will grow by 4.5% this year relative to global GDP growth of around 2.4%. The well-documented MENA-Asia flow growth continues to be significant.

Maureen Sullivan – North America: We haven’t seen any slowdown in intraregional activity. From a US perspective, the projections appear to show a GDP-stable growth environment of around 1.6% for 2013. It’s not overtly robust, but it indicates stability. Our view is that because there will be increased spending and investment out of this region, it will have an impact in other economic regions. The brightest spot in the US economic landscape is with the export sector, which is poised for continued growth, with more robust trade lines between North America and Asia, and North America and Latin America.

Kuresh Sarjan – Asia: Asia tends to be the global hub of trade and there’s a lot happening here, both inter- and intraregionally. It is a robust region for trade finance for the banks, as companies continue to relocate here, particularly in Singapore and Hong Kong and more generally in Asia Pacific. We operate with a direct presence in 12 countries across the region – and in others, such as Vietnam and Bangladesh, with preferred correspondent banks. In almost all we continue to see healthy activity.

Do you see more investment by corporates outside of their own home regions?

Kuresh Sarjan – Asia: Japanese companies have, for a long time, been at the forefront of global operation, but also now South Korean, Chinese and Indian companies have a much bigger footprint globally. In fact, the base of Asian inter-regional investment has accelerated, particularly out of China and India.

Maureen Sullivan – North America: Historically we’ve seen our large corporate clients well-represented with international investments, but we anticipate that there will be broader investments by our mid-sized corporate clients over the next few years, in alignment with their heightened interest in expansion as a catalyst for corporate growth.

Dennis Dubois – LatAm: We are seeing a lot of mid-sized clients entering markets they might not have considered previously. Mexico has always been of interest as a long-standing US trade partner. Given its proximity to both the US and LatAm markets, some companies are discussing either shifting or expanding manufacturing in Mexico to replace or add to what they are currently doing in Asia and evaluating how that drives supply chain/logistical efficiencies. Brazil clearly remains the principal magnet in the region, but we also have numerous large and mid-sized clients interested in selective investments in Colombia and Peru.

Martin Knott – EMEA: It is important to understand the drivers behind this investment where it happens. For example, it may be to widen a client base or to find new or contingency suppliers. From the supply-chain perspective, we continue to see demand from Asia — China in particular — albeit activity is wide and varied. Whilst there has not been a significant change in the level of investment specifically from a trade perspective, the rationale and drivers have changed over time.

Looking at global versus regional capabilities, are there truly any trade products or services which can be used in any country?

Bruce Proctor – Global Trade Head: When we approach product development or roll-out we try, wherever possible, to have a standardised approach that can be adapted to fit specific market requirements. We have to take a broad view of how products fit in the market and how we can use them effectively so we are not, for example, taking a US product and force-fitting it into South East Asia. As we take it to the regions we ask what we need to do to make sure we are competitive and compliant with all local requirements – but we also give our clients something of a global experience.

Kuresh Sarjan – Asia: This is a regulated market environment and regulations continue to change, depending on each country’s priorities and political imperatives and their own capital and external debt and balance of payment positions. In China, for example, there was a material change last year in the way banks were allowed to account for their short-term trade borrowings, e.g., having to treat the trade advances they received for their own existing trade exposure as ‘on balance sheet’ items. As a result, we’ve had to restructure a number of our products which are applicable in the FI space in China.

Maureen Sullivan – North America: Generally, trade products allow clients to do business in different countries by normalising the nuances of different regulations, language, customs, and so on, and this is the sweet spot of trade finance. We help our clients interact with their counterparties and reduce risk in the most cost-effective fashion.

Dennis Dubois – LatAm: Although most trade products are fairly homogenous, where variations are seen, they tend to be less about the product itself than how it can be used. As an example, in some countries withholding taxes can be an issue depending on how transactions are structured, so deal structure is likely to be more important than the product itself.

Martin Knott – EMEA: It is always important to look at the client’s in-country requirements for a deal structure. These requirements may be different for the operating company of, for example, a US-parented company, compared to those of a client indigenous to that country. Acceptability from a local regulatory perspective, and an appropriate legal framework, will always be a leading consideration.

Will we see a move to multi-banking, where banks use the same neutral platform, in the trade business as we have in cash management?

Martin Knott – EMEA: From a technology perspective, we have seen more multi-bank deal structures, particularly in the supply-chain finance space. As clients have looked to expand their programmes either by value or geography, the need to bring in multiple banking partners has increased.

Maureen Sullivan – North America: There is already a nascent version of a multi-banking platform that exists for some of our large corporate clients. This was established as they migrated to host-to-host file formats. There is opportunity for further improvement though, to eliminate a lot of the separate integration effort, but the challenge is the cost-benefit of deploying and maintaining a neutral platform from which all participants can benefit. It continues to evolve, so we do see multi-banking, but not necessarily across all trade finance products.

Dennis Dubois – LatAm: What applies to North America also applies to Latin America where, among the largest companies, cost-benefit is always evaluated. Yes, they would ideally like to be on one platform rather than multiple bank platforms, but a lot of LatAm corporates are still very closely tied to one or two banks in-country. Those banks may have less sophisticated platforms, but they will always be part of the relationship, so it’s a two-track development dependent on client size and sophistication.

How are new solutions and technologies such as SWIFT’s Bank Payment Obligation (BPO) and International Chamber of Commerce (ICC) Uniform Customs and Practice for Electronic Presentment (eUCP) received in the regions?

Kuresh Sarjan – Asia: There is a healthy interest in new solutions with a number of players across the region, particularly in China and India, adopting SWIFT tools in the trade space. When guidelines for the BPO are published by SWIFT and the ICC Banking Commission, it will drive further impetus in this area.

Dennis Dubois – LatAm: If there is a new solution that we can deliver, and local traditional banking partners cannot, when benefits are clear to the corporates, they will obviously work with the banks that can deliver. But when it comes to the traditional product suite, long-standing relationships are still an important component of decision making, though less so in top-tier clients and markets.

Bruce Proctor – Global Trade Head: The ability to be able to move more quickly onto newer technologies will be a driver of a lot of business. Generally, businesses in developing countries are faster at moving to newer technologies because they don’t have the legacy systems in place to impede progress. But, increasingly, all trade clients are technology-dependent and that is why we are investing substantial sums into our client-facing and operating platforms and processing capabilities. The fact that we have made all our products available paper-free is an indication of where this industry is going.

Maureen Sullivan – North America: Our corporate clients are always looking for ways to streamline the document-intensive nature of trade finance. They are looking for a less-costly solution, and one that will give them greater visibility. But there is a hesitancy to go down one path unless there is confidence that it will be the standard. There is a wait-and-see approach around which protocol gains the greatest number of users.

Another wait-and-see for 2013 is how far renminbi (RMB) will progress as an alternative currency.

Kuresh Sarjan – Asia: The RMB continues to rise in its acceptance as a trade settlement currency in the region. I think the size of what it will constitute, as a percentage of overall global trade, investment and payment flows, is still anybody’s guess. There are projections of between 10% and 30% by 2015. How soon will it become a substitute or alternative to USD, again, is anybody’s guess. But the numbers are sizeable and there has been much progress over the last few years.

Bruce Proctor – Global Trade Head: One of the big questions is whether it will become freely convertible on a broad scale. If there is an aspiration to make it a reserve or alternative currency for a substantial amount of trade financing, the ability to freely obtain it through commercial foreign exchange transactions, or to be able to provide longer-term financing in RMB outside of China, are issues that need to be addressed. We will certainly see more Asia-related activity in RMB.

Key players

Global mega-banks have long-dominated the global trade market, but a number of large regionals have become formidable competitors. How should global banks respond?

Dennis Dubois – LatAm: It’s really a question of market segmentation and focus. In some markets, such as Brazil, Chile and Mexico, there are large indigenous banks who offer local products needed by all local companies. International banks offer global solutions to large local clients but most have little interest in offering purely local solutions. There is a space where both can offer complimentary solutions and partnering, either from a balance-sheet perspective or through access to local infrastructure, which can make a lot of sense.

Kuresh Sarjan – Asia: Regionals in Australia, Japan and in South East Asia, for example, are moving forward rapidly. We collaborate with them on developing solutions that benefit common clients, and we work with them as clients, but this is an important sector to watch. The overall trade finance product suite continues to evolve and our regional peers have some very good solutions. It is a large market, but at the same time it is highly competitive.

Martin Knott – EMEA: In the region there are domestic, regional and global mega-banks. It is less common that all three will be going after the same client, so in the trade space there continues to be room for a number of players. Additionally, we see more opportunities for banks to work in partnership to meet client requirements.

Maureen Sullivan – North America: Global banks that have the footprint can provide sophisticated financing and structuring solutions and offer an on-the-ground presence in support of multinationals. However, regional banks continue to play a role, working through the mega-banks, in the delivery of trade solutions where regional banks don’t have the on-the-ground presence. It can be a synergistic relationship and does not have to be either/or.

Risk management, credit and pricing

Kuresh Sarjan – Asia: In terms of specific measures, there are a number of syndicated structures in the region for trade. We are one of the largest trade risk distribution desks in Asia Pacific. This enables us to give some reciprocity to some of our preferred trade correspondent banks, in Europe for example, that may not have as large a footprint as us in Asia, but at the same time allowing us to share the risk.

Martin Knott – EMEA: In general terms, I think one of the key elements of risk is perception. Using technology to assess risk is one tool, but it is no substitution to living and breathing the market in which you are operating. In trade we continue to see increased activity in the risk distribution, securitisation and risk insurance space as effective tools for the trade business.

Maureen Sullivan – North America: Key for us is managing reputational risk and being sure we are in compliance with all regulatory requirements and guidelines. We deploy a variety of risk-mitigation activities to help us manage our trade finance solution set, making sure standalone products can be accretive to the overall banking relationship we have with our corporate clients.

Bruce Proctor – Global Trade Head: As well as reputational risk, risk understanding from a credit point of view is critical as it supports our client selection process. Our regional offices spend a lot of time working with our legal and compliance teams and with our operational groups, to ensure that we are really taking a broad view and doing the right deals with the right clients and in the right manner.

As part of a successful relationship, something that is incumbent upon us as a global player, is to be viewed by our clients as a good source of knowledge. Increasingly, they are looking for insight, advice and information on their markets. We operate on the ground in many countries and have a lot of exposure to events in the economic, political and social spheres and can help them. I think that is truly a differentiation point.

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