Canada
Local Banks
Tough choices
for Canadian banks
decisions about their level of interest, risk
tolerance and commitment and commitment
to the business of international trade
finance. Canadian banks, as a whole do
not have the capabilities to sustain a global
footprint, and will need to devise some
creative strategies to remain relevant over
the long term,” observes Malaket.
A place for traditional
products?
Despite the majority of exports heading
across the border to the US, trade between
Canada and the emerging markets is rising,
and to a certain extent it is providing banks
with an outlet for their traditional trade
finance tools such as letters of credit.
“The majority of our LC business is
conducted with emerging markets. Our
Canadian banks have rarely been seen at the forefront of trade
finance developments, but with both domestic and global
competition becoming tough, they are now picking up the pace,
writes Rebecca Spong.
longer-term structured finance transactions
tend to be conducted in markets in Central
and Eastern Europe, such as Turkey or
Kazakhstan, and in Asia, including India,”
comments Charles Attard, vice-president
of structured trade finance, at Toronto-
Canada’s trade banks are facing some
The decline of traditional trade products is
Dominion Securities, part of the TD
difficult decisions over how to maintain and
a theme echoed across the globe, not just
Financial Group.
develop their trade finance products. The
in Canada. A new trade finance survey from
Allen Barabas, head of global transaction
Canadian market has remained fairly stable,
the association for financial professionals
solutions at Royal Bank of Canada, adds: “If
but, to a certain extent, it has been lacking
(AFP), and sponsored by Canadian bank
you have your biggest trading partner south
innovation. Alexander Malaket, principal at
Scotiabank, reports that organisations that
of the border whom you trade over 90% of
Opus Advisory Services, based in Toronto
use open account methods usually use it
your exports, and the culture of the country
remarks: “The Canadian banks as a group
as their primary method of trade finance.
is similar to yours and the laws are more or
are not particularly ‘out front’ in terms of
In total, companies use open account for
less tied into yours and you have entered
supply chain finance, or indeed innovation
nearly 47% of their trade activity, while just
into a bilateral trade agreement under Nafta
in the trade finance space, but they are
36% of their trade transactions use letters
eliminating barriers and tariffs it becomes
working to keep pace.”
of credit.
more or less transparent to deal with. You
Yet patterns in Canadian trade and financing
Not only are financing tools changing, but
deal on an open account and don’t use
methods are rapidly evolving, and the
the general economic and trade outlook for
as many trade finance instruments and
banking sector will need to decide whether
Canada is also looking relatively gloomy.
products.
to adapt or retreat entirely from the market.
The Bank of Canada issued a report in
“On the other hand you will deal with
Around 80% of Canada’s trade is conducted
October predicting reduced economic
countries from whom you buy raw material
with the US, and most of this is now
growth for Canada. It blames defaults in
and semi-finished/finished goods and who
conducted on an open account unsecured
the US subprime mortgage market for
need trade instruments to sell you products
basis. This development has the potential
weakening US demand, and also predicts
therefore you rely on trade finance products
to push the banks out of the finance supply
the unexpected strength of the Canadian
and services.”
chain, unless they create a means of
dollar will cause a “significant drag” on
Statistics from Canada’s department of
still adding some kind of value to a trade
Canadian exports.
foreign affairs and international trade have
transaction.
“Canadian banks will need to make
demonstrated that exports to the emerging
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Canada
Local Banks
Convergence
of product lines
“CIBC believes that having a product
than trade with the US.
In August, US$29.163mn-worth of export
The AFP report suggests that rather than
financing is mandatory in trade finance
business with the US was recorded. A
acting as a safe hold for letters of credit,
business these days,” remarks Silvia
significant amount of business, but it was a
the emerging markets are helping shape
Brudar, head of financial institutions at
decrease of 1.9% compared to the previous
complex new global supply chains.
CIBC.
month’s statistics, as well as a decline of
Scotiabank’s Cefis observes: “In addition
She adds: “If you talk to any of the other
3.2% compared to August 2006 figures.
to the flow of finished goods and services,
Canadian banks active in the trade market,
In comparison, exports to markets outside
the globalisation of production sources is
they will likely all report that they are
the EU, Japan and the US reached
leading to increased trade of raw materials
developing some method of supporting
markets are growing at a far faster pace
solution in the area of supply chain
US$5.186bn, declining by 1.1% compared
open account trade transactions.
to the previous month.
“There are a few options available to us,
However, it represented 17.8% of growth
we can either buy the necessary supply
compared to business recorded in August
chain finance software and a vendor-based
2006.
solution, or partner up with another global
In turn the Canadian banks are following
bank that has an international footprint and
their exporters. “We are very active in trade
a platform. You can also develop your own
finance in the so-called Bric countries, and
product that not only serves as a vehicle
also have a significant presence in Mexico
for the transfer of information, but also
where Scotiabank is the sixth largest
provides the financing capability, a solution
bank,” remarks Alberta Cefis, executive
that therefore supports both the physical
vice-president and group head, global
and financing aspects of the supply chain.”
transaction banking at Scotiabank.
Several years ago, in an effort to make
In August Scotiabank also expanded its
operations more cost-efficient CIBC
presence in the Chilean market, after
decided to outsource some of its trade
agreeing to purchase 79% of Banco del
banking operations. The arrangement was
Desarrollo for US$810mn, with the intention
Fitzsimmons at BMO Markets:
only a partial outsourcing, covering credit
to purchase up to 100% of the bank.
Creative thinking
and standbys, and the bank remains highly
active in other fields of trade finance.
Inevitable trends
parts that are being traded several times
Outsourcing trade transaction processing
Yet, emerging markets may soon no longer
before they become finished goods.
is something the Canadian market might
be an outlet for traditional trade products,
“The challenge and opportunity for trade
soon have to consider very seriously.
with the AFP survey suggesting the long-
finance providers is to understand this new
“Given the size of the market in Canada,
term use of letters of credit in these regions
dynamic.”
and the operating scale and cost base of
may not be as entrenched as once thought.
One tactic adopted by Canadian banks to
the banks here, it would be reasonable
It predicts that business in China and India
ensure their product offerings can support
to believe that outsourcing operations is
is likely to involve an increasing proportion
the new demands of a globalised supply
a serious consideration, and will become
of trade transactions carried out on an open
chain is to converge and consolidate their
more compelling as the capabilities of
account basis.
business lines.
providers continue to improve. Whether
It reports that 57% of transactions for those
Scotiabank is probably the Canadian
certain banks will look at outsourcing as a
organisations that conduct business in
pioneer in this field, being the first bank in
strategic option, or whether market realities
China do so via open account, compared to
the country to establish a global transaction
will force them to do so, the question is a
29% of transactions that are conducted via
banking (GTB) division, through which it
very real one,” she suggests.
letters of credit. It also reports that 42% of
integrated its various products such trade
organisations that trade with China expect
finance, cash management, payments,
Platforms and partnerships
their use of open accounts to grow, while
foreign exchange, and correspondent
BMO Capital Markets is one of those banks
just over a quarter expect to increase their
banking products and services.
which has looked to partner with other
use of letters of credit and just 14% believe
A number of other banks followed suit,
banks, and share processing capabilities.
they will need to increase their use of
including Toronto-Dominion Securities
In 2001, it founded the Proponix platform
guarantees.
which also has an integrated global
along with Barclays and ANZ.
Looking across at the Indian market, the
transaction services division.
It was originally a joint venture company
survey reports that 48% of organisations
which offered trade finance services
trading in India expect their use of open
Technological developments
to banks wanting to outsource their
accounts to rise, while just under a third
Implementing the necessary technology
operations. It acts as a web-based global
predict their use of letters of credit to grow
is essential to Canadian banks wanting
trade finance platform that integrates
and only 9% forecast any hike in the use of
to support Canada-US trade flows, and
transaction processing, web-based
guarantees.
Canada-emerging markets trade.
reporting and a corporate trade portal, all of
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Canada
Local Banks
which aims to make trade processing more
announced a partnership with Citi. It has
In an official statement, Cefis comments:
cost efficient.
appointed the global bank to provide an
“It becomes expensive and inefficient to
The platform has now been acquired by
Asian re-issuance processing service
buy different services in each market, so it
CGI, a Canadian technology company,
for its commercial letters of credit in the
has become a worldwide trend to look for
which has maintained the banking practice
region. By tying up with Citi, TD BankNorth
financial services providers that can offer
within the group.
aims to take advantage of Citi’s document
global solutions and capabilities wherever
In October during Swift’s annual Sibos
checking and processing services based
they operate.”
financial services conference, held in
in the bank’s trade operations centre in
Boston this year, BMO launched a new
Penang, Malaysia.
Mergers and acquisitions
With concerns about how Canadian banks
open account product via the Proponix
platform. It is known as ‘bank-assisted
Connecting to the core
should sustain their trade finance activities
open account’ and is a hybrid between
Scotiabank is also working to develop
given the pressure of a small marketplace,
a letter of credit and an open account
cost efficient technological solutions
limited deal pool and increasing global
transaction.
for its clients, and is developing its own
competition, there was much talk a few
“Technically this is an open account
technological platform to support the needs
years ago about the possibility of mergers
transaction, but we do some form of
of clients within its core regions of Canada,
between Canadian banks as a potential
document checking,” remarks Philippa
the US and Mexico.
growth strategy.
Fitzsimons, director, supply chain and trade
It is creating a Nafta platform that will
However, the political world and the
solutions at BMO Markets.
provide the bank’s clients with integrated
general public were at the time not
Fitzsimons reflects on the decision to set
cross-border cash management, trade
convinced by the proposition, and the lack
up the Proponix platform: “Like all banks,
finance and FX capabilities for Canada,
of enthusiasm for the concept remains
and is unlikely to change while a minority
our volumes for LCs had been in decline,
but we did not retrench. We had made a
very strategic decision a number of years
ago to pursue the Proponix platform,
and that coupled with new alliances, has
enabled us to do more creative types of
trade finance and stay ahead of the curve
as the market evolves.”
BMO Capital Markets has also just signed
up with Swift trade services utility (TSU).
“Our new Proponix enhancements will
be compatible with the TSU enabling
communication back and forth with the
The will for bank
mergers within the
Canadian market
has declined with
banks finding they
can grow organically
themselves
government is in power.
But some in the market have suggested
that with there being a possibility for an
election before the end of the year, the
topic could be up for debate again.
Yet others believe the interest has
permanently waned, as Attard at TD
Securities explains: “The will for bank
mergers within the Canadian market
has declined with banks finding they can
grow organically themselves both through
domestic expansion and also through
acquisitions outside of Canada, thus
TSU to maximise the potential benefits,”
avoiding the need to merge.”
Fitzsimmons explains.
She adds: “The beauty with all these
Mexico and the US. “We will gradually
Attard speaks with experience, as the
initiatives, whether it is payables financing
extend this platform to other regions to
TD Bank Financial Group has completed
for a large corporate buyer, or receivables
provide a more robust global offering
its acquisition of US bank Commerce
discounting for a large corporate or mid-
for our customers that increasingly
Bancorp, having signed a US$8.5bn
market supplier, is that we can load all of
more integrated international banking
transaction at the beginning of October.
this data on to the Proponix platform. In
requirements,” Cefis at Scotiabank
Through this, the TD group has access to
turn, this information will be available on
explains.
a further 2,000 branches in North America,
our front-end portal, so that our clients will
The bank’s GTS unit, in conjunction with
and becoming the first bank with critical
be able to get comprehensive reporting
its subsidiary Scotia Capital, has just
mass in both Canadian and US markets.
on all of their trade activities, including
taken one step closer to consolidating its
This deal follows the group’s previous
collections and open account financing.”
product offerings, after having launched
acquisition of another US institution,
Also during Sibos, Citi announced it had
its new US-based services, covering cash
BankNorth.
signed a collaboration agreement with CGI
management and payment services at the
On the same day TD Securities announced
to jointly market trade services processing
end of October.
the acquisition of Commerce Bancorp,
and technology infrastructure by linking
The new product is now available to
RBC also revealed its US$2.2bn
up Citi’s established global trade finance
Scotiabank’s corporate and commercial
acquisition of RBTT Financial Group based
capabilities with the Proponix technological
clients across the US, allowing them
in Trinidad.
platform.
access to ScotiaConnect electronic
These are just further examples of how
US bank TD Banknorth, the wholly-owned
banking service for real-time balance
Canadian banks are trying to employ
subsidiary of The Toronto-Dominion
and transaction information, among other
“creative strategies” to stay relevant in the
Bank in Toronto, has followed suit and
features.
global trade finance market.
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