EU Referendum and British trade

 

Since June, the outcome of the EU Referendum has dominated headlines – and the thoughts of financial services professionals worldwide. Although the historic vote to leave the EU may have presented some organisations with challenges, Adrian Walker, Managing Director, Head of Global Transaction Banking at Lloyds Bank, believes there are opportunities for financial institutions to work in partnership to support the future of British trade across the globe.

Adrian Walker

Managing Director, Head of Global Transaction Banking, Lloyds Bank

Adrian Walker

“Such collaboration will need to function across a number of areas including service excellence, credit appetite, documentation negotiation, funding support, and FX.”

In the wake of the EU Referendum result, one thing has remained a constant for the British economy: uncertainty. At a time when economic recovery was starting to show promise, Britain voted to leave the European Union, its largest trading partner, and now faces negotiating a withdrawal.

Aside from the initial impacts on exchange rates, stock markets, and interest rates, one of the most significant challenges facing both financial institutions and their corporate clients is that the view of the future remains opaque. It is still unclear for instance, when article 50 will be invoked and what the UK’s exit strategy will look like. Only as negotiations start to unfold will this picture become clear.

Additional challenges

Compounding the uncertainty, some, including the Financial Policy Committee, see the present high level of the UK’s current account deficit as a potential source of risk (Figure 1). Perhaps reflecting this and the level of uncertainty, the Pound is at a 30-year low against the US dollar. To help mitigate some of the risks in the economic outlook the Monetary Policy Committee has reduced interest rates to an all-time low of 0.25%.

Although the picture might appear somewhat challenging, there is often opportunity to be found. As has been widely discussed in the press, with a fall in the Pound, British goods and services are becoming less expensive – and therefore more attractive – to companies and consumers around the world.

This is an excellent opportunity for UK businesses to export – either for the first time, or expand into new markets as part of an existing overseas strategy. At Lloyds Bank, our vision is to help Britain to prosper, globally. As a major UK financial institution, we are committed to facilitating British trade both now and in the future.

(Figure 1) - Balance of Payments Current Account Balance as per cent of GDP

Working together

One of the key ways that UK banks, including Lloyds Bank, are looking to accomplish this is through strategic partnerships. Not only with bodies such as Britain’s new Department for International Trade, but also through a network of trusted partner banks across the globe.

As such, British financial institutions may increasingly look to establish new partnerships and reinforce existing working arrangements with banks worldwide in order to support their corporate clients as they export into new territories. Such collaboration will need to function across a number of areas including service excellence, credit appetite, documentation negotiation, funding support, and foreign exchange (FX). And, inevitably, companies looking to expand their export base may come up against challenges at each step of the value chain, and will require support to overcome them. This could give rise to numerous partnership opportunities for UK and overseas financial institutions.

Take a typical manufacturing value chain (Figure 2), for instance. At each of the five steps, UK banks and overseas partner banks will be able to work together to help British exporters settle payments, take advantage of currency movements, reduce risk, and maximise working capital in a post-Referendum world, while maximising business opportunities. Let’s take a closer look at each of those five steps.

 

1. Tendering/negotiating contracts: With the Euro having strengthened against the Pound and the Dollar, European and buyers further afield are likely to be hungry for high-quality British exports.

This is where financial institution partnerships that cover a range of different geographies will become even more important for the future of British exports. For example, while traditional trade instruments, such as tender guarantees and performance guarantees could help corporates boost their attractiveness to existing and prospective overseas buyers (and are therefore likely to be in growing demand), UK banks will require the support of local partner banks to issue these guarantees in-country.

Additionally, supporting the beneficiary’s needs across the globe will necessitate the expertise and coverage of a network of partner banks. This creates a win-win situation for partner banks as working with UK financial institutions and their clients will lead to new business opportunities.

2. Sourcing of inputs: Due to their often globalised supply chains, British companies ramping up their export activities are likely to see an increased requirement to bring goods and inputs of production into the UK. To manage supplier performance risk, especially as these companies look further afield for new inputs, they are likely to use products such as Import Letters of Credit (LCs), Guarantees and Standby LCs. In order to be delivered globally, such instruments require strong collaboration between partner banks. Financial institutions also play a key role in jointly ensuring that working capital is optimised for both buyer and seller.

Clients may also increasingly look to use solutions such as Supplier Finance or Bills of exchange to help bolster suppliers’ working capital and underpin sourcing. This will drive a growing requirement for UK banks to onboard suppliers globally, as well as making payments into new geographies, and mitigating risk – all of which will require the assistance of a worldwide ecosystem of local partner banks.

3. Manufacturing: Productivity is a crucial consideration for British companies looking to remain competitive in the wake of the EU Referendum. As new technologies such as 3D printing and additive manufacturing become more accessible, there will be a number of companies considering reshoring their manufacturing activities, especially as the cost of off-shoring goes up. Implementing a reshoring strategy will of course require significant capital expenditure, which may also include importing equipment from overseas. However, with interest rates at an all-time low, it’s a great time for British companies to be investing.

As well as driving a flow of Import LCs out of the UK, this increased capital expenditure will bolster the requirement for overseas suppliers to access working capital by discounting receivables and Bills of exchange from UK corporate buyers, via their own local banks. Consequently, UK banks, such as Lloyds Bank, have the necessary appetite to support these local banks, either by participating in the UK corporate buyer’s risk or providing Bill Avalisations. Additionally, for companies looking to manage their working capital when making significant equipment and machinery purchases, there may be a need for bank syndicates to form in order to support asset-backed lending.

4. Shipment/sales: Understandably, clients considering opportunities with new buyers or in new markets will be looking for support to assess and mitigate risks. As a result, we will likely see more Import LCs being requested by UK exporters to manage buyers and/or sovereign risk. This will not only drive UK LC flow, but also increase traditional trade business for overseas banks, in particular those in close partnership arrangements with UK financial institutions.

5. Servicing/after sales: This final part of the value chain can be an important differentiator for overseas companies looking for new UK suppliers. By facilitating the delivery of excellent after sales support, through the provision of a warranty guarantee issued by a local partner bank, for instance, financial institutions can work together to help give British exporters a competitive edge in overseas negotiations.

A bright future

In summary, by working in partnership to facilitate safe and efficient international trade, financial institutions are in a position to help Britain to prosper globally, and to generate new business opportunities both at home and overseas across traditional trade, open account and FX. We at Lloyds Bank are looking forward to playing our part in helping our clients grow and prosper in this new paradigm.

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