French banks’ dominance in trade finance weakens

French banks such as BNP Paribas have cut funding of small and mid-sized companies with low credit ratings because of growing regulatory and political pressure, risk aversion and weaker profits.

Reuters/London

The world’s top trading houses appear to be quickly turning into commodity finance banks, by lending billions of dollars to clients as a decades-long dominance of French banks shrinks.

The fast growing trend has made big headlines in the past year every time a large Swiss trader provided financing to a counterparty, ranging from European refineries to African state firms.

The trend is certainly growing, yet bankers and trading executives say it is far more nuanced than merely the exit of banks and the entry of traders.

Banks such as BNP Paribas have cut funding of small and mid-sized companies with low credit ratings because of growing regulatory and political pressure, risk aversion and weaker profits.

But banks still feel comfortable in providing large trading houses with billions of dollars in credit lines and then often watch this money being re-lent at higher rates to those they chose not to deal with directly.

Recent deals have shown how far trading houses have gone in providing commodity finance. Last month, Glencore agreed to provide a $1.4bn pre-payment loan to Chad’s national oil company. Its rival Vitol this spring signed a $500mn trade finance deal with mid-sized Russian oil firm Bashneft.

“These are exactly the sort of deals we were doing at BNP a few years ago when we were market leaders,” said a former BNP banker, who left together with dozens of colleagues as the bank shrank its trade finance department.

“But big traders are still getting money from us, banks, be it via credit revolving facilities or other lines,” he added.

BNP scaled back its trade finance department in the past years as it cut down on risks amid a US probe over violations of sanctions against countries such as Sudan.

BNP declined to comment.

Kris Van Broekhoven, global head of commodity trade finance at Citi, said large trading houses were effectively doing part of the job previously done by banks.

“Some of the large trading houses are bridging the time between when financing is required and when banks are able to provide it. They have become much more active in arranging, structuring and syndicating financing,” he said.

Citi and other US banks have been enlarging their trade finance divisions to partially fill the gap left by BNP.

French bank Societe Generale said it was committed to supporting clients in trade and commodity finance, irrespective of size, as it remains an area of focus and development. It did not provide figures.

Large trading houses have been packing their ranks with trade finance bankers as they grow in the sector.

“At least 95% of the pre-payments we do as Trafigura are not public deals,” head of Trafigura’s trade finance, Stephan Jansma, previously with Rabobank and Fortis Bank, told Trade Finance Magazine this year.

In summer 2013, Trafigura made public its $1.5bn pre-finance deal with Russian state oil major Rosneft following a similar $10bn deal guaranteed by oil exports between Rosneft and rival traders Vitol and Glencore.

The size of the transactions, one of the largest pre-payment deals ever organised by trading houses, sent powerful signals about the scale of changes in the market.

“Traditionally, banks that have been involved in pre-export deals have had less of an appetite for those kinds of transactions. And consequently traders are stepping into those deals and restructuring them into pre-payment deals,” he said.

But it is also clear, that apart from publicly listed Glencore, trading houses have relatively small capital. Trafigura’s shareholder equity is in the area of $5bn and Mercuria’s of $2.7bn.

So the money has to come from banks.

Trafigura’s annual report says it deals with more than 130 banks across the world, has $42.5bn worth of credit lines opened to it of which $13.4bn of headroom or excess liquidity “to ensure resilience in all market conditions”.

A $2.65bn revolving credit facility raised by Geneva-based Mercuria last month offers another example.

The deal involved 52 banks and was led by some of the biggest names in trade finance, including ABN AMRO, BNP Paribas, Credit Agricole, ING Bank, and Societe Generale. But it also included many smaller players. To see the list

“I must confess that out of those 52 banks - I’ve never even heard of some of the names before. Especially in connection with trade finance,” said a senior executive involved in the deal.

“That just shows that some banks and investors are seeking a decent yield but don’t want to get involved in complicated trade finance leaving this to trading houses.

Compared to five years ago it is a completely different world.”

Trade finance helps small and mid-sized players avoid tying up large amounts of their capital when trading, as an average cargo of crude oil costs in the region of $100mn.

But banks generally have much larger capital that even the biggest Swiss traders, who now act as lenders.

“What is already happening is the transfer of risk from banks to traders which have very much smaller capital and which are less regulated,” a former senior BNP employee said.