U.S. companies are exporting goods and services in record numbers, and many banks are responding by beefing up their trade-finance units.
Citigroup (NYSE: C) and Fifth Third Bancorp (FITB) are among the large and regional banking companies that have been hiring international banking experts and adding new services in an effort to capture more trade-finance business.
Huntington Bancshares (HBAN) recently established a dedicated international banking division and lured a top commercial banking executive away from Fifth Third to run it. Late last year Huntington was also named a preferred lender by the Export-Import Bank of the United States a designation that essentially allows it to finance more overseas deals.
Bankers say they are strengthening their trade-finance units because their business customers are demanding it. Domestic sales have been relatively flat in recent years, and many companies view overseas sales as crucial to sustained growth, says Sam Moore, the head of trade sales and finance at Fifth Third in Cincinnati.
"Trade is central to the needs of our client base," Moore says. "To be really relevant in today's marketplace a bank needs to have international capabilities that it can deliver."
Rajiv Goswami, the head of international banking for Citi Commercial Bank in the U.S., says the surge in exports is being driven largely by midsize firms covering a broad range of industries from agriculture to pharmaceutical supplies to scrap metal. Citi is aiming to meet the demand by working more closely with smaller firms it's already a major lender to large exporters -- as well strengthening relations with the Ex-Im Bank, the U.S. Small Business Administration and other federal agencies that encourage trade, Goswami says.
Some industry watchers worry that banks are not going far enough in their efforts to meet clients' export ambitions. Most large banks have representative offices in foreign countries Citi is even opening offices in Iraq and regional banks will be at a disadvantage if they don't do the same, argues Peter Hughes, a Long Island consultant who advises banks on working with middle-market companies.
There's also concern that many community banks have been slow to develop the necessary expertise in in foreign trade and that they risk losing clients to larger banks if they don't add or properly train staff.
"More and more companies are looking to export, and banks are going to have to address their ability to provide financing," says Bill Houck, the regional director of the SBA's Middle Atlantic office of international trade. "But for right now most community banks are sticking to what they know."
Still, at a time when all banks are starving for new sources of revenue, many see trade finance as an obvious line of business in which to expand. Total exports of U.S. goods and services hit a record $2.2 trillion in 2012 and that figure is expected to increase as developing countries such as India, China and Malaysia continue to grow. It helps, too, that the federal government has been sweetening incentives to exporters as part of the Obama administration's stated goal of increasing exports to roughly $3 trillion by 2015.
"If you are a middle-market company in the U.S., where the [gross domestic product] is growing at 2% to 2.5%, then you can either fight it out here or go to markets that are growing at a rate of 8% to 10%," says Hughes, managing partner at CLB Advisory LLC in Dix Hills, N.Y. "The demand for export finance is going to go up dramatically and will continue to grow dramatically."
Hughes pointed to Huntington as an example of a bank that is taking advantage of the opportunities in global trade. The Columbus, Ohio, bank has long offered letters of credit and other fee-based trade services to its business clients, but it wasn't until it hired Sheila Spradlin Reich away from Fifth Third in November that it had a division dedicated to trade finance.
Spradlin Reich has since hired four international banking experts all of whom are fluent in a foreign language and strengthened its foreign-exchange capabilities so that it can better advise clients on the risks of dealing with a particular country's currency. It is also using the government guarantee provided by the Ex-Im Bank to make more working capital loans to manufacturers or to help overseas firms buy goods and services from its clients. The result: in the first four months of this year, the international banking division's revenue rose 131% over the same period last year, Spradlin Reich says.
Rick Remiker, the managing director of Huntington's specialty banking division, says that Huntington chooses which business lines to enter based on the needs of its marketplace. Apart from the international banking unit, it also launched an energy lending division late last year to cater to firms in the gas, oil and coal industries, and an agribusiness unit that provides financing and other services to food producers and farm-equipment dealers.
Trade finance was a natural fit for Huntington because the Midwest is home to so many manufacturing firms that ship their products overseas, Remiker says. It is also an area in which many foreign firms set up shop, and Huntington is looking to cater to them as well.
Fifth Third has been even more aggressive in its expansion in trade finance, roughly quadrupling the size of its international banking team over the last couple of years, according to Moore.
Fifth Third has hired trade-finance experts from larger banks, and recruited existing staffers with strong relationship management skills and provided them with the right training, Moore says. He would not disclose the division's revenues but says the unit is playing an important role in helping the bank deepen relationships with its business clients.
"We have found that having a global-institutions group is extremely helpful and important in meeting the needs of our client base and opportunities in the market," he says.
CLB Advisory's Hughes says a big challenge banks face in building a thriving export-finance division is finding qualified talent. One reason he believes some banks have been slow to enter the business is because there aren't enough bankers out there who know the ins and outs of trade finance.
"They might know what a letter of credit is, they might know what a bankers' acceptance is, but they don't know how to sit in front of a CEO of a $20 million company and tell them how to deal with a $500,000 order," he says.
Still, Hughes argues that it is it worth it for banks to develop the talent because, he says, the return on cross-border business is "far higher" than the return on domestic business.
"You are dealing with CEOs who are much more concerned about selling to their clients, so they are not going to nickel-and-dime you on every wire transfer or letter of credit, so the return on capital winds up being 25% to 30%," he says. "With domestic [business] we can't even get close to 18%."