Problems for bank customers often have a way of becoming problems for banks. But when a small business in rural Arkansas came to Regions Financial last year looking for help, the issue was what one might describe as a good problem to have.
The customer had landed a large contract with a global firm to manufacture pipe bundling equipment for a project in Mexico. Although it was nice to attract new business in a slow year, the company wouldn't be paid until production was complete- and it would take nearly a year to manufacture the equipment.
Regions came up with a line of credit that would finance up to 75 percent of the ongoing costs to fill the order, allowing the manufacturer to hire the employees and purchase the materials needed for the job. And because the credit line was backed by the U.S. Export-Import Bank, a government agency that helps fill gaps in private export finance, 90 percent of Regions' exposure was guaranteed, offsetting most of the perils of lending against inventory, along with the repayment risks associated with foreign receivables.
Against a backdrop of record U.S. export activity, Regions, like other banks around the country, has recognized the huge demand for trade finance services, and the benefits of providing them. Financing importers and exporters that buy or sell products in emerging markets around the globe can offset weaker loan demand in other business lines as the U.S. economic recovery plods along. And offering such services to business customers tapping into foreign markets for the first time can minimize the chances of their defection to other banks that might better accommodate their growing needs.
"I can't say enough about how much of a focus this is for us now," says Carson Strickland, vice president and global trade sales manager at Regions, which is ramping up its trade finance activity in a quest to be one of Ex-Im Bank's top producers. "Trade is growing faster than the U.S. economy."
The $130 billion-asset Regions, based in Birmingham, Ala., has seen 15 percent annual growth in trade finance revenue for the past two years, and it expects growth to at least match that pace for the next several years. The uptick in traderelated business has been strong enough that Regions recently brought on two additional trade officers, increasing the size of its trade sales team to seven.
The ripple effects of the sovereign debt crisis in Europe serve as a stark reminder of the complexity and volatility of a globally connected economy. But for banks willing to help facilitate the movement of goods around the world-a prospect made more palatable by Ex-Im Bank's guarantees against working capital loans and the like-trade finance can be a useful instrument for meeting a new imperative of the post-crisis era: deepening relationships with customers.
In the case of technology firm Ruckus Wireless, its banking relationship grew along with the company's international reach. When Ruckus formed in 2004, Asia and Europe were the only places in the world where mobile carriers used infrastructure that was compatible with the start-up's technology for transmitting Wi-Fi through TV signals. The Sunnyvale, Calif., company, which has relied on Silicon Valley Bank for several years to provide letters of credit and other traderelated services, now has employees in 24 countries and customers in 80 countries.
"We've raised $51 million in venture capital, but we've also used working capital loans and letters of credit from Silicon Valley Bank when we've needed it," says Ruckus' Chief Financial Officer Seamus Hennessy. "They are tools in our toolbox to be able to expand internationally."
As a niche bank to technology startups, Silicon Valley Bank was able to get Ruckus as a customer early on by providing international trade financing in addition to a business checking account and other traditional products.
Ruckus sells to its customers in U.S. dollars but pays employees and suppliers in local currencies, so it also makes frequent use of Silicon Valley Bank's foreignexchange services.
"It's all about client retention, to provide financing and then keep adding value with more services," says Mike Selfridge, head of regional banking at SVB Financial Group, the holding company for Silicon Valley Bank. "It's tremendous for a bank to drive that gross profit by offering more services that clients need."
The $20 billion-asset SVB, which is based in Santa Clara, Calif., works with business customers in 26 offices across the country. It also has client-facing offices in the U.K., China, India and Israel.
Not every bank needs as elaborate a trade-finance strategy as SVB, whose CEO resigned last year to lead the firm's efforts to form a joint venture bank in China. (The executive, Ken Wilcox, remains chairman of Silicon Valley Bank.)
But for banks competing for the business of multinational companies, it's become increasingly important to have more "boots on the ground" in foreign markets- particularly as trade flows continue to evolve from their traditional east-west pattern (between Asia, the United States and Europe) to a crisscross of routes connecting Asia, Africa and Latin America.
The scale of the shift comes into sharp relief in places like Brazil, a hotbed of economic activity even before it began feverishly building infrastructure to handle the World Cup in 2014 and the Olympics in 2016. In the middle part of the last decade, 90 percent of Brazil's trade flows were with the United States. Today, 90 percent of Brazil's trade flows are with China.
Few banks have been as prepared as Citigroup, historically the most global of the big U.S. banks, to handle a transformation of that magnitude. "Because of our global infrastructure, we have the ability to leverage that flow and support our clients in Brazil, whether their goods are going to the United States, to China, or pretty much anywhere in the world that is looking to purchase their products," says John Ahearn, global head of trade at Citi.
While Wells Fargo has a much more limited global footprint than Citi, it, too, can capitalize some on shifting directions in trade flows. That's because about 125 other banks around the world outsource their trade finance services to Wells, says Richard Yorke, the head of Wells' international group.
Wells conducts trade-finance services for other banks in its Hong Kong office, a back-office operation with about 430 experts that Wells inherited via its 2008 acquisition of Wachovia. The Hong Kong office also can take advantage of the difference in time zones to handle overnight processing of documents such as letters of credit for Wells' U.S.-based customers.
Like other top producers on the Ex-Im Bank's list, Wells has authority to approve deals up to $10 million on the agency's behalf. Larger deals, up to $25 million, get fast-tracked, with Ex-Im Bank deciding within 10 days whether to grant approval.
U.S. Bank, a unit of the $330 billion-asset U.S. Bancorp in Minneapolis, has a different approach to trade finance than the money center banks, according to Paul Oldshue, executive vice president of the company's international banking group. "We do not intend to be a local bank in foreign markets," he says.
"Our feeling is that strategically we have a comparative advantage in understanding our clients within the U.S. and how to price those risks, but in foreign markets we don't have that same comparative advantage."
That doesn't mean U.S. Bancorp is ignoring the opportunity in trade finance, which if nothing else provides a counterbalance on the income statement as a business where income is predominantly fee-generated.
"It lowers the risk of our earnings stream to have a mix of fee and net interest income," Oldshue says "It reduces the risk when margins are tight or wide that our earnings are not going to be volatile."
Trade finance also has become an important diversification tool for Asian- American banks, not only in terms of their income streams but in terms of loan book concentrations. Chinese-American companies such as East West Bancorp and Cathay General Bancorp, and Korean- American companies such as BBCN Bancorp (formerly Nara Bancorp) and Hanmi Financial have a natural affinity for trade finance, as many of their Asian-American customers import or export goods from their ancestral homes. But trade finance has become even more important since the recession, especially as commercial real estate lending-a bread-and-butter business for these banks-continues to struggle, says Brett Rabatin, an analyst at Sterne Agee & Leach.
Certainly that's been the case at the $5 billion-asset BBCN in Los Angeles, renamed after Nara bought neighboring Korean- American banking company Center Financial in November. Before the merger, commercial real estate loans comprised more than 70 percent of Nara's loan portfolio, Chief Operating Officer Bonnie Lee says. While the acquisition of Center lowered that concentration somewhat, BBCN is now doubling efforts to increase commercial and industrial lending, and trade finance services comprise a good deal of that push.
At Sept. 30 (before the merger closed), Nara's commitment in trade finance lines had increased about 24 percent year-todate, and its outstanding balances rose 28 percent. These customers also contribute to the bank's noninterest deposits, which helps lower its cost of funds, Lee says.
While Nara's deposits at Sept. 30 had risen 3 percent from a year earlier, to $2.27 billion, the company was able to reduce Federal Home Loan Bank borrowings by 14 percent to $300 million, and "other" borrowings by 91 percent to $701,000.
Some banks appear uniquely positioned to take advantage of established trade routes. Comerica Bank, for example, has a growing footprint in Texas, Arizona and California, where many customers conduct business over the southern U.S. border.
Comerica moved its headquarters to Dallas in 2007. Before then, it was based in Detroit, where customers conduct a great deal of business across the northern U.S. border. As a result, Comerica is one of the few U.S. regional banks with offices in both Mexico and Canada, says Gary Luxon, vice president and director of Ex-Im Bank activities for Comerica.
"We consider ourselves to be a NAFTA bank, in that we have a North American platform," Luxon says. In 2010, Comerica ranked sixth in use of Ex-Im Bank's working capital guarantee program, approving 28 loans totaling $98.2 million. Other banks are working hard just to educate customers on the topic of exporting. The trade finance sales team at Regions has become deeply involved in export councils, state commerce departments and local chambers of commerce throughout the Southeast, speaking at events on average once a week on how to export, how to get paid and how to find financing. Through these events, the bank and its partners have enticed businesses to start exporting, says Donald McCorkell, senior vice president and head of global trade at Regions.
Umpqua Holdings also has teamed up with local economic development agencies and the like to give seminars in numerous markets where businesses can learn how to use Ex-Im Bank and U.S. Small Business Administration trade finance programs. "We emphasize to companies that they need to regard the global market as part of their business, and they need to make exports part of their strategy on an ongoing basis," says Tony Oriti, head of Umpqua's international banking division.
In some respects Umpqua is waiting for customers to catch up with the bank's capabilities. But it wasn't long ago that exporters banking with Umpqua were waiting for the bank to catch up with them. After all, it was only three years ago that Umpqua even established an international banking division.
"We're a Pacific Rim bank located on the West Coast in Portland, Seattle and San Francisco, which have some of the most active ports in the West," says Cort O'Haver, executive vice president of commercial banking for the $11.8 billion-asset company. "We have customers today asking us how we are doing international trade, because they are selling their products overseas. Quite frankly, we weren't really able to be their primary bank if we didn't do this."
Katie Kuehner-Hebert is a freelance writer Based in San Diego, Calif.