latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/trade-finance-revenues-to-take-coronavirus-hit-as-risk-of-default-hike-looms-57505171 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

In This List

Trade finance revenues to take coronavirus hit as risk of default hike looms

Street Talk Episode 56 - Latest bank MOE shows even the strong need scale to thrive

South State CenterState MOE Shows Even The Strong Need Scale To Thrive

Talking Bank Stocks, Playing The M&A Trade With Longtime Investor

Report: Kashkari Says Fed In Holding Pattern But Rate Cut Still Possible


Trade finance revenues to take coronavirus hit as risk of default hike looms

As the new coronavirus disrupts global supply chains, experts warn that trade finance revenues are bound to take a hit and that an increase in default rates could impact banks' financing appetite.

A pause on trade and production across China is already taking its toll on the global economy, with credit insurer Euler Hermes having estimated that lockdowns are costing $26 billion per week in potential losses of exports of goods and services to the country.

SNL Image

Factory floors in China, such as at this dairy producer in Beijing, have posted lower production numbers due to the impact of the coronavirus.
Source: AP Photo

Trade finance banks may be able to contain the crisis for now, but they "will be hurt in the process," according to Eric Li, research director at Coalition, which tracks the performance of the world's top 10 transaction banks. Declining trade volumes and the Fed's rate cut have prompted the research company to downgrade its growth forecast for trade finance revenues for 2020 to negative 5% from 1%.

Matters could get even worse if default rates were to increase, according to experts.

"What banks will be worried about is defaults," said Michel Kilzi, managing partner at Fineon Exchange, an online marketplace for trade finance.

Default rates for bank-originated trade finance have historically been low across products and regions, according to the International Chamber of Commerce, which analyzed 25 trade finance banks' transactions from 2008 to 2017, the most recent available data. With export/import loans, for example, the ratio is 0.19%.

SNL Image

This has led some industry players to label the asset class "recession-proof."

However, the impact of the coronavirus cannot be compared to that of the 2007-2008 financial crisis, said Li.

"This is a corporate crisis, it's different. If you see a deterioration in underlying commercial flows, we are worried the industry is not ready," he said.

A jump in default levels, Li said, would be the "number one evil" for trade finance providers, as just a small increase would significantly impact their portfolios.

"A move from 0.2% to 0.3% default rate represents a 50% increase. It means a bank's bad debt reserve has increased by 50% for that quarter. No big bank can handle that," he said.

He said it would likely prompt even more "flight to quality" in which banks seek large investment-grade corporate clients, leaving smaller players without access to finance. The industry has already been severely impacted by this trend since the global financial crisis, leading to a trade finance gap of between $1.4 trillion and $1.6 trillion globally, according to the Asian Development Bank. This could worsen as a result of the current crisis, Li said.

S&P Global Market Intelligence approached a number of trade finance banks for comment, but none was provided.

A global challenge

The coronavirus will be a big concern for Chinese banks in particular. A prolonged health emergency could cause the country's nonperforming loan ratio to more than triple to about 6.3%, amounting to an increase of $800 billion, S&P Global Ratings said in a February report.

"The resilience of China's banking system may be severely tested," the report said.

However, the nature of trade finance means that the impact within this line of business will be much more global, said Li.

Hong Kong, the U.S., Japan, South Korea and Germany are most exposed to losses from paused trade with China, according to Euler Hermes.

Smaller banks will likely be hit the hardest, Li said. Large transaction banks, such as those tracked by Coalition — which include Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, HSBC Holdings PLC, JP Morgan Chase, Société Générale SA, Standard Chartered PLC and Wells Fargo & Co. — are better placed to weather the storm because they are able to serve large investment-grade clients, he said.

Government initiatives to support businesses, such as the World Bank's COVID-19 support package, could go some way toward curbing the worst consequences for now, said Kilzi. The package comprises $6 billion from the International Finance Corporation, which will be spent to help commercial bank clients expand trade finance and working capital lines.

Companies will also be looking for alternative sources of trade finance, such as nonbank financial institutions, Kilzi said. "They are more flexible, more agile, they can react faster," he said.

Trade finance funds have already recorded significant growth over the past decade in light of banks dialing back their trade finance operations.

Coalition is owned by CRISIL. S&P Global Market Intelligence and CRISIL are owned by S&P Global Inc.