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Asian banks to challenge global lenders' dominance in regional trade finance

Asian banks are set to chip away at European and American lenders' dominance in Asia's trade finance market amid uncertain prospects for global trade, experts say.

For now, Singapore-based DBS Group Holdings Ltd. is the only Asia-headquartered bank among Asia-Pacific's top five lenders in trade finance in terms of market share, according to an estimate by research firm East & Partners. Asia's trade finance market, estimated at US$2.15 trillion as of 2017 by International Chamber of Commerce, has long been dominated by HSBC Holdings PLC, Standard Chartered PLC and Citigroup Inc., East & Partners said.

But as China and the U.S. impose tariffs on each other, there is a growing demand from small exporters and manufacturers across Asia, particularly in low income countries, for affordable credit, Steven Beck, head of trade finance at Asian Development Bank, told S&P Global Market Intelligence.

Compared with global banks, Asia-headquartered lenders are better positioned to capture that demand and expand their market share, said Sangiita Yoong, an East & Partners analyst. Yoong sees the region's lenders as more willing to cut interest rates and fees, and more likely to lend to companies with weaker credit profiles.

"We do see more local banks being active in supporting trade in developing countries," Beck said, noting that larger global banks are more cautious about expanding into the challenging markets.

Meanwhile, global banks are seeing declining margins as price competition in trade finance in Asia, ranging from lending to letters of credit, export credit and insurance, has always been intense, said Eric Li, research director for transaction banking at research firm Coalition.

"The spread in Asia is way too low and is becoming almost unsustainable," he added.

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As such, large global transaction banks are cutting their existing trade finance exposure in Asia, Li said. Asia-Pacific trade finance revenues at the 10 largest transaction banks globally came in at US$1.1 billion in the first six months of the year, with first-half trade finance revenues from the region on a downward trend since 2013, according to Coalition data.

There has been a lack of appetite among global banks to lend to small companies, especially after the financial crisis, the World Trade Organization said in a 2016 report on trade finance.

The ADB's Beck estimated that unmet demand for trade finance in Asia is currently around US$600 billion. The gap will likely widen this year, he said, as trade growth tapers, global economic growth slows and global lenders become more cautious in lending to particularly developing economies.

"It's fairly easy for a bank to acquire a certain degree of assurance that a large company is not doing something illegal but it's much more difficult to get all of those assurances from a smaller company particularly in a developing market," Beck added.

Intra-Asia trade presents new growth

As trade with the U.S. may slow, Beck said intra-Asia exports and imports could pick up pace after growing for more than a decade on the back of economic growth in the region.

"[Trade tensions] might accelerate a rebalancing of Asian economies, including China, to have more focus on domestic and intra-regional demand and [be] less dependent on growth from exports to the west," Beck said.

As intra-regional trade rises, local borrowers might prefer local lenders which have strong funding networks and client relationships, Yoong said.

In 2017, more than US$9 trillion of trade finance transactions were processed globally, according to the ICC report released in May. Asia is expected to represent 38% of global trade flows by 2020, up from 36% in 2016.

Yet, growth in trade finance revenue will be challenging in Asia as price competition continues, according to Li.

"We are seeing a lot more supply [of trade finance] coming from Japanese and Chinese banks. Both groups have very big balance sheets... to play the game in the long run," Li said.

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

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