MASTERCLASS | D E U T S C H E B A N K
Cash management
and trade finance for
financial institutions
Financial institutions have certain needs that only global
transaction banks can fully meet, as Michael Imeson explains
Marcus Sehr, global head of cash management financial institutions product, GTB,
Deutsche Bank
Daniel Schmand, head of trade finance and
cash management corporates, Europe,
Middle East and Africa, GTB,
Deutsche Bank
Since the global financial crisis of 2008
there has been little let-up in the macroeconomic and financial market challenges
facing banks and other financial institutions. One of those challenges is managing
cash in times of low interest rates and continued market uncertainty. Another, for
banks at least, is meeting the increasing
demand for trade finance solutions.
Financial institutions ought to be able to
cope. After all, handling money is their core
business. But in many instances, when things
get complicated or involve developments in
foreign markets, they need to call on the services of a global transaction bank. These specialist banks, of which are there are fewer than
a dozen, have the necessary skills, experience
and global footprint to meet most financial
institutions’ complex cross-border cash management and trade finance needs.
“There is still a lot of uncertainty in the
global economy, and this is coupled with a
marked shift in trade patterns,” says Marcus
Sehr, global head of cash management financial institutions product, Global Transaction
Banking (GTB), Deutsche Bank. “In the past,
trade flows were dominated by the West, but
emerging markets are gaining an ever-greater
share of international trade. Latin America
and Africa are of increasing economic importance, and Asia remains the driving force, continuing its advancement at a rapid pace.”
As China and other export-driven Asian
countries have built enormous purchasing
power, the balance of trade in these economies has reached an inflection point. Previously heavy exporters, their development
has seen them switch first to importing more
raw materials, and now to importing consumer and luxury goods on a vast scale to
meet the swelling consumer demand of
their own populations.
“All these factors are affecting trade and
cash flows into and out of Asia. Our financial
institution clients are having to adjust to these
changes,” says Mr Sehr. “For example, supply
chains have become more intricate. There are
more links in the chain, with greater specialisation and granularity. This by definition
increases the need for trade and cash management products.”
His colleague, Daniel Schmand, head of
trade finance and cash management corporates, Europe, Middle East and Africa, GTB,
elaborates. “In trade finance we deal primarily
with risk-mitigation, so clients active in – or
dealing with – regions where there is
increased risk are those in greatest need of
our help.” By “clients” he means not only the
bank’s corporate customers using trade
finance instruments, but also the correspondent banks with which Deutsche Bank deals in
the course of providing these instruments.
HELPING BANKS PROVIDE
TRADE FINANCE
Banks in developed countries need to find
more intelligent ways of financing and supporting their exporters and importers. It is all
about mitigating risk – a corporate objective
which lies at the core of trade finance.
Deutsche Bank, with its extensive global footprint, is in a position to provide support to
companies engaged in international trade,
and by extension the banks that finance them.
“This can be illustrated by a high speed rail
link we helped finance in the Middle East,” says
Mr Schmand. “For this large infrastructure project, we covered both the importer in the Middle Eastern country and the exporter – a
Spanish-led consortium – by fronting a number of banks in a large guarantee facility. By
leveraging the strength of our international
network and our unique structuring capabilities, we were able to support both banks and
corporate clients for this project.”
For trade with developing countries, there
is still a strong demand for trade finance products that focus on risk mitigation, such as letters of credit and bank guarantees.
Long-dated export credit agency-backed
finance and medium-term commodity trade
finance are also in wide use.
By contrast, for trade flows in more developed markets such as those in northern
Europe or the Americas, or markets where a
lack of familiarity with trading counterparties
does not present a significant issue, the main
demand is for open account trading. Even so,
trading on open account can also benefit
from enhanced risk mitigation – something
that can be achieved through accounts
receivable financing (in the form of invoice
discounting and factoring), accounts payable
financing (that is, supplier finance) and private
risk insurance.
“It is impossible to know just how much
open account trade is secured through such
risk-mitigating methods,” says Mr Schmand.
DEUTSCHE BANK | MASTERCLASS
“Although a Swift transfer might appear in the
statistics as an MT 103 – an open account
trade – there is no indication whether the
underlying transfer has been financed or not.”
As global trade grows and the size of the
transaction banking pie gets bigger, transaction banks like Deutsche Bank will inevitably
benefit, even if an individual bank’s share of
the pie remains the same. Boston Consulting
Group estimates that the value of global trade
will grow by 440% between 2011 and 2020,
and this in turn will increase the need for
global transaction banking.
CASH MANAGEMENT FOR
FINANCIAL INSTITUTIONS
But it is not just trade finance where the efforts
of global transaction banks are needed. Services such as domestic and cross-border payments and clearing, foreign exchange,
electronic banking and treasury management
platforms are all vitally important, as enhanced
cash management is the key to success in
today’s economic climate.
Indeed, institutions are constantly looking
to control costs, become more efficient and
invest cash overnight. In all these respects
Deutsche Bank is well-placed to help.
“When assessing the requirements of our
clients, we look at two main things: the structure
of the financial institution’s business, and the
structure of its payment flows,” says Mr Sehr.
“In terms of business structure, many
institutions in the past had significant net
interest income (NII)-driven revenues. But
given the current interest rate environment,
these business models are now under pressure – with such low interest rates they cannot
make sufficient money on their account balances. So what we are seeing in the industry is
a move away from interest-based products
and a greater focus on fee-based products.
“That said, you can’t build up that part of
the business model quickly. So smaller institutions are revising their business models to
concentrate on their core capabilities and
finding other ways of providing value to their
clients. This often means leveraging the
products and research capabilities of a global
provider, like us, and integrating them into
the products and services they provide to
their clients. In this way they can offer product depth without the need for independent
development and the significant investment
that entails.”
As for financial institutions’ payment
flows, the key requirement here is clearing,
particularly in the two dominant currencies –
the US dollar and euro – that account for
over two thirds of commercial cross-border
payment flows. That said, clients can also
expect Deutsche Bank to support them in
their growing demand for emerging and
minor currencies.
THE IMPACT OF
FINANCIAL REGULATION
Like all banks, Deutsche Bank is adjusting to the
capital requirements directive (CRD) IV in
Europe. The bank has looked at the new capital
adequacy and liquidity regulations from all
angles to assess the likely impact on its business
model and product offering, and in particular
the effect on the bank’s leverage ratio and riskweighted assets.
“The asset-value correlation is an interesting element which affects trade finance lending between systemically relevant banks,” says
Mr Schmand. “Having fully researched and
modelled the type and scope of these
impacts, we now have a robust model to better enable us to adapt to the changing environment. We have the right client base and
the right composition of products, clients and
countries and can demonstrate this to both
our internal and external shareholders.
Despite the challenges faced in the market,
we will produce the right return.”
Having a full understanding of the regulations that affect clients – in trade finance and
cash management – is vital. This is illustrated
through SEPA, the Single Euro Payments Area,
which is being phased in and is nearing the
February 2014 end-date for compliance.
“SEPA is a prime example of how we have
mastered a regulatory change and turned it
into a business opportunity,” says Mr
Schmand. “By proactively reaching out to our
clients – corporates, banks and non-banking
financial institutions – we have become the
trusted SEPA bank.”
By having a clearly defined strategy and
the necessary scale to justify substantial
investment, Deutsche Bank has been able to
support its clients throughout the process
from day one.
“BY PROACTIVELY
REACHING OUT TO OUR
CLIENTS –
CORPORATES, BANKS
AND NON-BANKING
FINANCIAL
INSTITUTIONS – WE
HAVE BECOME THE
TRUSTED SEPA BANK”
INTEGRATED SOLUTIONS
Cash management and trade finance have traditionally been two different product sets, provided by two different parts of GTB to financial
institution and corporate clients, respectively.
Of course, as clients use both sets of products,
this raises the question of how GTB ensures a
fully-integrated offering.
“Our products and clients do not sit in
silos, and there is a great deal of collaboration and integration between my department and Daniel’s,” says Mr Sehr. “By
pooling our internal skills and expertise, we
are in a strong position to offer cohesive
end-to-end solutions.”
By taking this holistic approach and
increasing the coordination between the
two teams, Deutsche Bank’s cash management and trade finance business lines are
better placed than ever to provide first class
products for the entire value chain of their
clients’ business.
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