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How they benefit indirectly from trade conflicts

FrankfurtNew sanctions against Iran, an economic crisis in Turkey and various US trade disputes: For German exporters, the rising number of conflicts and growing protectionism are a major challenge. Because the environment for global trade has deteriorated noticeably. "The global risks have increased in the last three years," observes Ludovic Subran, the chief economist of the Euler Hermes Group.

Since 2015, country ratings have seen more downgrades than improvements. Overall, 42 countries, such as China, India or Brazil, were rated worse during this period, with only 35 countries, including Russia, improving their situation. For this year Subran expects an increase in bankruptcies, especially in China.

For institutions such as Deutsche Bank, Unicredit or Commerzbank, which finance a large part of German foreign trade, this means more business. For example, the institutes secure export and import companies against currency risks or use letters of credit to ensure that a company is paid for its delivered goods. "The growing uncertainty increases the need for hedging," says Thomas Dusch, vice president of global transaction banking at Unicredit.

He sees a growing demand in Africa, the Middle East and certain markets in Central and Eastern Europe. "Companies secure themselves above all when entering new markets or doing business with new partners."

High priority

This also observes his colleague from the Deutsche Bank. The companies in Germany did not withdraw from foreign trade because of the increasing number of conflicts, says Daniel Schmand, who heads Deutsche Bank's trade finance business. "Precisely because the economy is slowing down and traditional sales markets are breaking away, companies must increasingly open up new markets in other countries," he said.

The trade finance currently accounts for about one third of the turnover of the Transaction Bank of the institute. "The trade finance business enjoys the highest priority on the board," says Schmand. "We want to continue to grow between ten and 20 percent a year."

Unicredit is also expanding its involvement in the field – in Germany and across the Group. At Commerzbank, trade financing revenues increased in 2018 and market share was increased. "We expect a good development in 2019, too," says Commerzbank's Board Member Frank-Oliver Wolf.

The big trade financiers benefit from the fact that the business is not worthwhile for all banks. Although the need for such instruments is increasing, the number of financial institutions offering trade finance, especially in high-risk countries, is falling overall. "For banks with few transactions in trade finance, it is not worthwhile to maintain the correspondent bank network connected with costs and controls in all regions of the world," explains Schmand.

Small banks do without

The remaining banks can be remunerated accordingly: "The margins in the business go up because the risks are rising and because there is less competition, especially in high-risk countries," says Schmand. "The smaller and more exotic countries are, the fewer competitors there are and the higher the margins," says Commerzbank manager Wolf.

This development should continue. "The costs and risks in trade finance will continue to rise," forecasts German banker Schmand.

In recent years, many financial institutions have thinned out their contacts with banks in other countries: Government agencies are making banks more responsible in their fight against money laundering and terrorist financing and expect them to closely monitor their partner banks and international payment flows. This is expensive – even for the big banks.

"A broad network of correspondents is important in order to give companies quick commitments for certain financing instruments," explains Dusch from Unicredit. His bank also "adjusted" the network of partner banks, but also "analyzed exactly where our customers want to trade in the future".

Commerzbank, which once had the widest correspondent banking network of all German institutes, halved its network to around 2,500 in recent years. At the beginning of this year, however, the Executive Board decided to increase the number of correspondent banks again by ten percent, as Corporate Client Officer Michael Reuther recently said. This is especially true for emerging markets in Asia, Africa and South America. The bank now has better control systems and the staff is better trained.

Even Germany's largest private bank has "significantly reduced" the risks arising from its correspondent banking network, but has not said goodbye to retail financing from individual countries. "We are still present in 156 countries. We just can not afford to work together with 30 partner banks in high-risk countries, "explains German banker Schmand. "In high-risk countries, we have at least one but no more than three correspondent banks."

More: Deutsche Bank is also strengthening its trade financing business. Especially in South Asia she wants to expand her network massively.


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