Buying a global footprint in trade

Barclays' attempt to buy ABN Amro is a clear thrust that, among many other banking products, would give the UK bank a genuine global footprint in the trade finance arena. Jonathan Bell assesses the nature of this attempted acquisition and questions what impact such moves are having on the trade scene overall.

Very few banks have a genuine global footprint in trade – and by this we mean expertise and excellence in all disciplines, ranging from trade services, trade finance, commodity finance, structured trade, export/import finance, quasi-project finance etc, in every continent across the globe. ABN Amro does have a global trade footprint, and it is one of the leaders in the field. So who would have thought that it would become a target for Barclays, and what messages can be taken from this?

The move comes at a time when bank consolidation is set to become the flavour of the day. For Barclays, perhaps it is also a question of necessity – if it does not make this acquisition, what would be its next target, or would somebody else come along and try and swallow up Barclays?

There are many more facets to the banking scene than trade finance of course, although one should not forget the importance of trade finance. Some assume that in talking about trade finance one is simply referring to letters of credit, issuing and confirming trade paper etc. One senior European capital markets banker remarks: "You shouldn't see these consolidations as being related to trade finance. Trade is only one very tiny component for such banks." He does have a point, the M&A sides of banks and the trading floors and equities divisions have never had such good returns. Nevertheless, the senior banker mentioned, seriously does not know what makes up and takes place in a fully equipped global trade finance set-up today.

As we know, the trade product spectrum is far, far more than a bog-standard LC issuance or confirmation machine. Indeed, with the changes that have, and are continuing to take place as banks reorganize their trade divisions – from commodities to projects – we start to see real dynamic entities within banks that are far removed from the old product divisions. Some time ago banks switched-on to the need to service and finance the entire supply chain, and by so doing generate better returns on investment in the process.

These reorganizations are positioned to better service the clients. We now see old commodity finance units working hand-in-hand with project finance units and derivatives. At the same time much of what we used to call trade loans can be seen more as corporate loans under a guise of some form of trade. But the game is servicing the trade of the corporate – and banks are responding well to this in many areas. The resultant spin-offs which also come from a corporate who is being serviced in a trade finance capacity is immeasurable. One only has to examine some of the major corporate acquisitions taking place – particularly in the metals sector – to see the benefits. The Brazilian iron ore producer CVRD's acquisition of Inco is a good example, as one tranche of the $18 billion bridge loan, arranged by ABN Amro, Credit Suisse, Santander and UBS, was a $6 billion pre-export financing.

For Barclays a fit with ABN Amro would be a major plus on the trade side. Presently Barclays has good coverage of trade services including basic trade financing, but nowhere near as developed as that of ABN. Barclays also has some sizeable structured commodity and structured trade deals in Russia, although this is arranged through a very small team. In addition, Barclays has good coverage in African trade, although last year lost much of its soft commodity team there to Standard Chartered. From an export finance/structured trade perspective Barclays has limited coverage, compared to ABN, and would benefit significantly from a tie-up with the Dutch bank and the inroads it has made with such innovative products as ABN's SovRisc (Trade Finance, December 2005/January 2006). The ABN tie-up would also give Barclays extensive access to other geographic areas in trade where ABN is strong such as Russian Federation, Central Asia, South and South-East Asia and Latin and North America.

Unfortunately for Barclays the big stumbling block is the counter bid for ABN from The Royal Bank of Scotland (RBS) in conjunction with Fortis and Santander. Much has already been written in general in the mass media on this, but from a trade finance perspective a tie-up with RBS would not be such a good fit as that with Barclays. As one London banker puts it: "If RBS gets it (ABN Amro) you've got a whole different ball game." RBS has its sights squarely on LaSalle, an institution which ABN originally purchased to give it much better leverage in the US market.

While the protracted acquisition negotiations continue there are dangers that demoralization could set it with some ABN bankers. Some big names have already made a decision to move on. These include George Niedringhaus, global head of emerging market syndications, who has gone to VTB Europe, and the CFO of ABN Hugh Scott-Barrett who recently announced he would leave on 1 August.

Unicredit on the look-out
Italy's UniCredit is rumoured to be interested in acquiring France's Société Générale (SG). However, SG has denied that any friendly approach has been made. From a global trade finance perspective though, if such a move were to take place, UniCredit would be able to secure a truly global presence in all disciplines in trade finance, which it does not have at present. SG, like ABN Amro, has expertise in all areas and across the globe. UniCredit already has under its ownership Bank Austria Creditanstalt and HVB, giving it particular strength in Central and Eastern Europe. Geographically, SG would give it almost the rest of the world. A research paper by Morgan Stanley in April on such a move by UniCredit was entitled UCI/SocGen: Good fit but no reason to rush it.

There has also been some speculation that there may be some form of merger or acquisition between BNP Paribas (BNPP) and SG. However, CEO of BNPP, Baudouin Prot, recently stated: "I certainly do consider that a tie-up between BNP Paribas and Société Générale would carry considerable execution risk. Therefore, and I want to be very clear .... such a transaction is not on my agenda." For the record, we never thought it a likely tie up either.

Just how the ABN Amro saga pans out remains to be seen. But what is clear is that we are in for a prolonged period of bank consolidations as institutions seek greater economies of scale, and in some cases try to buy a global footprint in trade.