The International Chamber of Commerce, in its 2017 Trade Register report revealed that trade finance is a low-risk asset class. The 2017 Trade Register is based on USD 10.5 trillion worth of exposures and more than 20 million trade finance transactions occurring between 2008 and 2016. The products covered included import/export letters of credit (LCs), export/import loans, and performance guarantees. Subsequent reports in 2018 and 2019 also show a similar trend, further reaffirming the low-risk nature of trade finance.
These reports reveal that potential losses for trade finance compare favorably against similar asset classes, such as large corporate and small/medium enterprise lending. From 2008 to 2016, obligor-weighted default rates are low across all products and regions. Just 0.38% for import LCs on average and 0.05% for export LCs, 0.8% for export/import loans and 0.47% for performance guarantees. In addition to the low-risk nature of the asset class, trade finance also sees very short times to recovery, which is favorable for lenders.
Overall, the reports from the ICC find that, based on the previous 10 years of data, trade finance products provide favourable conditions for banks and other lenders. These include short average maturities, low credit risk, low default rates, and low loss rates.
Of course, the 2020 report is likely to reflect the disruptions in international trade due to the global pandemic. This will likely add to trends that we have already seen emerging in the recent past when studying the ICC reports. These trends include:
Trade Slowdown – Global trade has been slowing for some years now, however, this could be exacerbated by the events of 2020.
Bank Risk Appetite Low – Banks are becoming risk-averse and this may only increase in the atmosphere of the global pandemic.
Open Account is Growing – Large companies, in particular, are moving more towards open account. It is difficult to say how the pandemic will affect this, but trade finance providers must be aware. It is possible for this trend to continue or reverse post-2020.
Regulatory Challenges – Increased regulation is a mounting challenge. While necessary, it can become a significant inhibitor for banks.
Falling Margins – With margins low, banks must drive for operational efficiency to ensure viability.
Overall, these figures are healthy and promising for trade finance, particularly post 2020, when it will play a crucial role in rebuilding and reinvigorating global trade against a backdrop of mass disruption.
