Key Benefits of Trade Finance

What are the benefits of Trade Finance?

• It provides a flow of transparent and typically self-liquidating transactions
• It generates strong fee income potential at an attractive RAROC
• Trade debts have tended to be prioritised in the event of a moratorium
• Trade Finance offers an effective ‘foot in the door’ to emerging markets
• There is strong cross-sell potential along the Supply Chain
• Trade Finance enjoys a relatively low default experience (compared to straight corporate lending)

How does utilising trade finance affect risk?

Trade Finance offers a transparent and relatively low risk means of putting or keeping a foot in the door to the emerging markets. It can enhance a bank’s correspondent relationship with emerging market banks, relying upon the trade debt prioritisation to protect its interests. Also, by participating in a country’s trade flows, the door is additionally open to more capital market intensive offerings when the economic environment picks up.

What is the Earnings Potential of Trade Finance?

For each of the Trade Finance offerings, fee income potential is a driver over interest income, and this makes the products attractive compared to straight corporate lending. However, in many institutions these Trade products do not get fairly measured against other bank products, so for any serious attempt at Trade it is imperative that a Risk Adjusted Return on Capital (RAROC) is applied. Typical ‘ball park’ RAROC borne out by leading Trade / Commodity Finance banks should show:

• for traditional Trade Finance 20%+
• for Export Finance 25%+
• for Commodity Finance 30%+
• for Structured Trade & Commodity Finance 35%+.