A shift by trade finance banks in favor of serving U.S. importers rather than exporters is intensifying consolidation in this business, according to bankers.
The new focus on importers, many of whom are large retailers, follows an export falloff brought about by weakening overseas markets.
But bankers said that as they do more import financing, competition is growing hotter-and pricing thinner. This, they added, favors bigger institutions with bigger volumes, global networks, and better technology.
"Everybody's trying to build volume and lower unit costs," said Thomas L. Bayer, vice president for international banking at Mercantile Bank in St. Louis. "And banks have gotten so aggressive on pricing, you sometimes wonder if it's gotten a little out of control."
Increasingly, he and others reported, large U.S. retailers are demanding and getting letters of credit issued for free. And banks are making up for the revenue shortfall by processing payments to the overseas vendor.
Bankers said this trend, coupled with big mergers among U.S. banks over the last several years, means that more and more trade finance is becoming concentrated among fewer and fewer players.
According to the Federal Deposit Insurance Corp., 85% of the outstanding letters of credit were controlled by the top 20 U.S. trade finance banks in June, compared with 64% in December 1993.
"Smaller banks don't have the technology," Mr. Bayer observed. "Increasingly this game is falling to larger regional banks and money- center banks."
For small and medium-size banks, he and others said, the only solution is to form alliances with larger institutions and divide revenues from the business.
Companies such as Citigroup, Chase Manhattan Corp., First Union Corp., BankAmerica Corp., Bank of New York Co., and BankBoston Corp. already dominate trade finance in the United States.
These larger institutions have gained an advantage because of changes in the global marketplace.
As recessions deepen in Asia, Eastern Europe, and Latin America, U.S. exports are falling. Meanwhile imports-fueled by appreciation of the dollar against many other currencies-are rising.
"The forces driving global markets are hitting home," said Tom Kingston, managing director for global trade at BankBoston Corp.
According to the latest Department of Commerce figures, the U.S. trade deficit-the excess of imports over exports-shot up from $9.9 billion in January to $14 billion in September. So far this year, the deficit in goods and services is running at an annual rate of $166 billion, 50% above last year's $110 billion imbalance.
Meanwhile, banks' finance officers are under orders to reduce trade lines to foreign borrowers-even where demand for U.S. goods remains strong, as in Latin America-to reduce foreign exposure.
In fact, some bankers who recently attended a conference sponsored by the Bankers Association for Foreign Trade disclosed that their institutions have slashed billions of dollars in export credit lines since the beginning of the year.
"Trade finance is the shining star of most banks, but it is also the first thing to go," said Steve Capp, managing director for Latin American syndications at NationsBank Montgomery Securities, a unit of BankAmerica Corp. "There is tremendous pressure on banks to reduce their emerging market exposure by yearend, and the cutbacks have been indiscriminate."
Still, bankers and analysts said that even if the business is becoming more concentrated, it is hardly about to disappear.
Rising world trade over the longer term and steady profits mean that trade finance remains attractive for banks that can achieve significant market share.
"This business is getting more concentrated, but it's not about to go away," said David Mr. Gustin, a partner in Global Business Intelligence Corp., a West Vancouver, Canada-based consulting firm. "And banks have a franchise that's hard to crack."
The downturn in exports is also coming with a silver lining as economic turbulence overseas boosts demand for better-structured deals, tougher controls, and guarantees.
As risk increases overseas, bankers pointed out, exporting companies are demanding a broader and more complex guarantees.
Providing those guarantees, including letters of credit, export credit insurance and nonrecourse financing, of course, means bigger fees and hence bigger revenues for banks.
Bankers added that there has also been a "dramatic" increase in the use of public and private export credit insurance.
"As conditions get tougher in emerging markets, exporters want to do more to mitigate risk," said Darin Narayana, president of BancOne International Corp., a unit of Bank One Corp.
"Our role has shifted from lending to structuring transactions and mitigating and distributing risk using over 100 public and private agencies around the world."