Standard Chartered, the beleaguered emerging market bank, said it is getting some relief from trade finance in the Middle East as governments shrug off the oil crash and continue to spend on infrastructure.
Even though oil has lost more than 70 per cent of its value since mid-2014, construction of projects such as Abu Dhabi airport and Dubai Metro are still continuing, spurring the need for the import of machinery and raw materials, the bank said.
“We are seeing pockets of positive activity, but generally the market is pretty tough at the moment. That’s the reality,” said Michael Vrontamitis, the bank’s global head of trade products. “To grow our business, we’d like to focus outside of the commodities space.”
Trade finance is a form of intermediation for exporters and importers whereby banks or other financial institutions offer guarantees of payment including so-called letters of credit for goods.
Despite the gloom that low prices have engendered, Mr Vrontamitis said that he expected oil, which has dropped to about US$30 per barrel, to bounce back up to the $50 level by 2017. That drop has had the effect of shaving a similar amount off the returns the bank makes from financing the shipment of oil and other commodities.
“You are still seeing the volumes of deals at the same level,” said Motasim Iqbal, the Dubai-based head of regional transaction banking at StanChart. “What is not coming is the value. If I was getting 10 letters of credit previously, I am still getting 10 now. Twelve months ago those 10 letters of credit were worth more than they were 10 months ago.”
For banks in the UAE, activities such as trade finance, asset management and foreign exchange remittances are becoming more important as margins that come from lending have been dwindling in recent years amid record low interest rates.
It is not just the UAE that StanChart is focusing on. Mr Iqbal said that there are a growing number of opportunities in Iraq and Pakistan that are related to infrastructure, especially in the South Asian nation, where an economic revival is under way. Much of the work centres around financing the needs of UAE businesses going into those countries, he said.
StanChart has had a rough couple of years. It has been overhauling its business around the world over the past year in a bid to help it reduce costs by $1.8 billion and return to profit. Last July it appointed a new chief executive to lead its business in the Middle East and Africa as part of a global shake-up.
The lender has been badly hit as the value of most commodities, which underpin the economies of many emerging markets, have fallen sharply in recent years as demand from commodity-hungry countries such as China has waned.
It is not just low oil prices, however, that is giving trade finance a hard time. Increasing global regulations such as Basel III, which were put in place after the 2009 financial crisis, have meant that banks must put more cash aside as buffers against excessive risk-taking.
“New capital rules lead to a reduction in financing, availability of financing,” said Mr Vrontamitis. “So for every transaction that we do today, we are holding more capital against it than 18 to 24 months ago. That’s just the reality of the situation today and return of equity on those transactions has gone down over time.”
mkassem@thenational.ae
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