BBVA: A bigger slice of ECA-backed pie

“Overall, within trade it is a good year for us,” says Patxi Fernández Trocóniz, global head of trade and international banking (GT&IB) at BBVA. “On the domestic front, optimism remains despite the recent slowdown, with Spanish exports currently growing by close to 10%, and expectations that this positive trend could continue. And importantly, we have also increased our presence in a number of ECA markets. We are on a good path, and we are looking at double-digit growth.”

BBVA’s global trade business, included within transaction banking, was reorganised two years ago and combined with correspondent banking, covering short through to longer-term business backed by ECAs. GT&IB has presence in 22 countries, with the main teams being in Spain, Turkey, Mexico, and across many other Latin American countries and the US. There are also a number of countries where the bank has branches, providing the full spectrum of trade products.

“We’ve defined three main priorities: namely, to maintain a customer centric approach, helping our customers, wherever they are, to enter into new markets; to remain a gateway into and from Latin American (LatAm) markets, with a focus on SMEs in LatAm and Spain; and, we have the mandate to expand innovation, which has become a main focus of the bank, within trade finance.”

Developing markets provide the growth

Looking at general macro trends in the market, Patxi says the centre of gravity has been moving away from the Atlantic for some time, with the main developments in trade coming from Asia. “China is still performing well, with a greater contribution of the internal demand, while it remains one of the engines of the world. Additionally, developing Asian countries have proved their resilience during the financial crisis, and we are now seeing new markets – such as Myanmar or Sri Lanka – developing quite strongly. These are proving to be promising markets for trade with Spain, where we have companies very active in traditional sectors such as textiles and the like, but also in new opportunities within infrastructure.

"At the same time, we have been active in certain sub-Saharan African countries for many years, particularly in places such as Angola, where we have seen a lot of infrastructure expenditure on the back of strong modernisation efforts taking place. And within MENA, we have upped the ante, particularly within ECA-backed activity. As an example, we acted recently as IMLA on the major KNPC [Kuwait National Petroleum Company] transaction. Throughout the region, we are seeing new corporations coming to the ECA market that have been pushed there, among other reasons, because of the lower price of oil. There are also immense prospects within MENA because of the vigorous growth trajectory in certain markets. Dubai is a major case in point, with numerous projects – not least the developments taking place around Dubai 2020. Our clients are going there, so we will support them.”

But he does concede that trade developments in Latin America have been challenging over the past couple of years. The slowdown can be put down to various factors depending on the particular market he says – in Brazil and Peru the corruption scandals have impacted the activity, and in Mexico and Chile the price of commodities has had a downturn on economic performance. “However, in spite of all this, we have still done well. Overall, last year we were the number one ECA-backed lender in the region. And the LatAm-Asia corridor has become even more important for us. We do expect things to pick up though, and the forecast is for the LatAm region to grow by 2%-3% next year.”

Looking at the impact of politics, Patxi notes that the initial concerns over some of the potential implications of current American administration policies related to Mexico, which is one of the bank’s largest trade markets, might have been overdone. “We still need to wait and see what will happen, negotiations about NAFTA [North American Free Trade Agreement] are progressing reasonably well, but there are nevertheless controversial issues still to be resolved. Some 80% of Mexican exports go to the US, so NAFTA is vitally important to the country.”

Similarly, he notes that there is considerable uncertainty surrounding the whole issue of Brexit and that it will last for a while– and uncertainty within trade makes for difficult planning. But he does believe that Brexit will also throw up a number of opportunities for trade along with the challenges.

Pushing for a bigger slice of the ECA pie

With regard to longer term trade-related business, Patxi is insistent that BBVA is gearing for a larger slice of the overall global pie – but on a selective basis, and in relation to where the bank’s client base looks for business opportunities.

“There are a lot of macro developments taking place that make sense for our increased involvement in the ECA-backed space”, he declares. “As an example just within LatAm, Mexico is now opening up its oil industry to the private sector. This will help attract new investors to a sector that was previously shrouded in protectionism. Similarly, the opening up of Argentina is going to be very important for the ECA market. The potential pipeline of projects is huge. And if we link all this with China, whose president announced last year that it will be making some $250 billion in investments in LatAm over the next 10 years, there are immense opportunities for us to capitalise on in a region that we know very well.”

He adds: “Other ECA-related opportunities will also arise related to the promising prospects that surround the Belt and Road initiative, and as part of China’s search for new customers for their industries. And, as I mentioned earlier, we are making inroads into ECA-backed activity within MENA as those oil producers look to diversify their sources of funding. As a summary, we are willing to work with different ECAs in regions where it is a benefit to our clients."

On the issue of liquidity, with 85% of global trade being conducted in US dollars, there is also the issue of cost of funding for financial institutions. He states: “Last year we did an ECA-covered bond of $1.5 billion. This was a good source of funding and helped us with our liquidity needs. In addition, the new French refinancing scheme also looks interesting to us. That said, competition in deal pricing within the ECA sector continues to be a problem and therefore originate to distribute will be a bigger thing for many banks going forward.”

Regulatory impact hits trade and SMEs

Like most, Patxi agrees that the bulk of financing is still going to the major corporations, and SMEs and even MEs are still losing out. This, he stresses, remains a real concern, as financing is critical for SMEs. On top of this, he also notes that increased regulation linked to KYC processes has impacted the SME space, especially in countries perceived as high risk countries

“SME business activity is very relevant for us, as middle-market companies represent 60% of our business in the trade finance space. Covering both the exporter and the importer in a commercial relationship really makes a difference in terms of customer experience, and through our local offices we are actively trying to identify our clients’ trade counterparties to help facilitate their transactions. Common management of the trade and correspondent banking areas of the bank has been very useful in this regard,” he says.

He adds: “The development of supply chain finance programmes has been a rapidly growing part of our value proposition. Part of our success has been the approach we have adopted whereby we have looked to the large corporates and built the structures to seamlessly allow them to deal with the SMEs and MEs in their supply chains. We have been particularly active in Spain, where many of the companies are dealing with Latin American clients, and we also have a big local platform in Mexico. We are now approaching many global clients with these platforms, which we can use worldwide.

Competition within supply chain finance is huge though. Therefore, we always adapt to our clients’ circumstances: this is why we cooperate with SCF fintechs - as well as with other banks if there is a client angle there. As KYC will continue to be an issue within supply chain finance programmes, knowing the suppliers - one of our strengths in certain markets – and onboarding those into the programmes, remains key.”

Patxi is also keen to point out the growing link between supply chain finance and supply chain management, which he perceives as a significant trend. “There is a real link between the physical and financial supply chain – and with the amalgamation of these there are benefits for both. We have been talking with specific P2P platforms and we are looking to do something in that space.”

Banking experience and fintech flexibility

The arrival of fintechs will be beneficial for banks’ trade finance operations, says Patxi, as there are numerous avenues for cooperation. “There are many fintechs working in the retail space, but digitising the trade finance business is something different. As a trade bank, we still have the clients. Fintechs have the flexibility. Our approach is to be open, and we are taking a collaborative strategy.”

As part of these changing processes, Patxi acknowledges that there needs to be a change in mindset with the way most banks have traditionally operated. This, he believes, includes different credit risk procedures. To date, the bank has been actively analysing and collaborating with fintechs, even participating in some. As an example BBVA through its venture capital arm Propel has a stake in the financial supply chain finance company Taulia. “We constantly analyse which fintech fits best with what we do, and that also applies to blockchain developments. To help facilitate additional business involving new platforms and fintechs within trade, we have created an onboarding committee focused in maximising the value of each initiative.”

In other fintech developments, BBVA recently became a member of Singapore-based CCR Manager (Capital & Credit Risk Manager), a wholly-owned subsidiary of Tin Hill Capital. CCR Manager, which also has support from the Monetary Authority of Singapore, is a web-based platform launched in May 2017, designed to help FIs buy and sell debt instruments to optimise their balance sheets for capital and credit relief and liquidity.

Patxi says this platform is a good opportunity to further look into the values of secondary distribution of trade assets, noting that the bank established a framework for this activity some two years ago.

Of course, blockchain and distributed ledger technologies (DLTs) are nothing new to BBVA. BBVA is a founding member of the Enterprise Ethereum Alliance and also a member of Hyperledger, the open source blockchain community. It recently joined as a founding member the Alastria Network, Spain's first blockchain consortium.

In addition, BBVA is involved in the R3 consortium, the database technology company, along with over 70 of the world’s biggest FI’s, in the development of blockchain usage in global financial systems. “We have been very active in all aspects of DLT usage,” says Patxi. “With Ripple, we have also done a pilot experience on payments between Spain and Mexico using blockchain technology. The problem is though how to connect the various DLTs into a more encompassing trade programme.”

On a more general electronic documentation front, he notes: “One of the big problems we deal with is getting customers to accept electronic documents. It’s a challenging process, and complete acceptance is far away. Some regulators are proposing ‘sandbox environments’ just to test this, so they are moving in the right direction."

He concludes: “We are committed on innovation to increase transparency. Ultimately blockchain or other developing technologies may provide the transparency that everybody is looking for.”