By Omar Al-Bakri, Director of Wholesale Financial Services at Alderbooke, an Executive Search and Culture Diagnostics firm
Traditionally, banks have provided up to 80% of the financing for the trading of commodities worldwide. However, since the financial crisis, an increase in regulation and accountability has forced many banks to repair their balance sheets, tighten their credit policy and adhere to a more punishing regulatory environment. At the same time, macro-economic factors such as slowing commodity prices, weakening growth of emerging markets and concerning geopolitical pressures, have also hit the banks hard.
This new world of risk-averse banking has forced the traditional players in this sector to loosen their grip on the structured trade finance market and relinquish some territory; according to the Bank of International Settlements, banks now make up only 50% of the Commodity Trade Finance credit market, a significant decrease from earlier years.
Risk or reward
This divestment has not been without its perils, however. Disposing of “riskier” trade assets has been a costly affair for the banks, with some emerging market transactions selling for as little as 60-70 cents on the dollar. Moreover, the need for increased capital allocation, now a key component of the structured trade finance business, has also resulted in additional costs.
Of course, there have been repercussions for the banks’ customers as well. The banks’ departure from the structured trade finance market has not only had an impact on their own balance sheets, but has also affected a wide range of small and medium sized companies. Often coined the ‘lifeblood’ of the UK economy, SMEs usually suffer from more provocative risk profiles. As such, finding a replacement source of funding has been extremely difficult in recent months, as there are few partners who are willing to provide the required financing.
The early bird catches the worm
As the traditional banks edge away from structured trade finance in the near to medium term, many have re-assessed their business operations as well as their internal resources, resulting in lower headcounts in many cases. However, one firm’s loss may be another firm’s gain; the banks’ loss of market dominance in this area is likely to benefit other firms who still see value in the structured trade finance market and continue to grow this part of their business.
The market has already seen a rise in the prominence of regional banks, who have met some of the existing demand for this type of finance. This increased lending activity has also been augmented through non-traditional channels, including trading companies and commodity houses. .
The introduction of these new players into the primary markets has merely scratched the surface in terms of the demand for this type of financing. As a result, asset managers and buyside firms are also looking to capitalise on this opportunity by exploring the viability of investing in this asset class.
Attracting the best
Asset managers and buyside firms continue to enjoy fewer regulatory restrictions than traditional banks, meaning there is more flexibility around which products they are able to invest. As a result, asset management firms are already making headway in the trade finance space, to varying levels of success.
One main problems for many of these firms is resource, finding the expertise and knowhow to make their investment in the structured trade finance space a success. The solution here is simple. As part of their cost saving initiatives, many banks have been forced to reduce headcount in their structured trade finance departments, particularly those at the senior end of the talent pool. This influx of valuable resource at senior and managing director level is therefore an opportunity for asset managers to hire the staff with the expertise required to lead teams, understand market activity and attract new clients in this highly broad and complex market.
The key here is to act fast; individuals that could make the transition to the buyside are a rare commodity within the financial services sector and although they may come at a price, their experience is invaluable and incomparable. However, it’s not all about the salary. Firms need to remember that many of these people will have become disillusioned with this sector, having been left to stagnate while the banks took and axe to these businesses. As such, it is important to communicate the fact that these new roles have been created to capitalise on their particular skills and talent.
Proof of investment
Above all else, asset management and buyside firms need to show their new employees that they are ready, willing and able to invest in building a robust structured trade finance offering. To this end, firms should outline how crucial this new area of the business will be as part of its wider commercial success.
By clearly stating the firm’s short, medium and long term goals in this area, employees will be able to see that the company is making a major investment in both business strategy and expert resource, which should help to eliminate any concerns that the new role will follow the same path as their previous position.