LONDON Booming commodity trade financing in Asia is a rare bright spot for Western banks, forced to withdraw from other areas of commodities due to tougher regulation and capital constraints.
Commodity revenue for banks has shrunk dramatically in recent years and in the first half of 2013, turnover in the sector for the top 10 investment banks slid by about 20 percent to $2.7 billion, according to financial consultancy Coalition.
"Yes, there's been a very large decline in revenue, but it's not down everywhere. There are certain elements of commodities revenue that have actually been doing quite well," said George Kuznetsov, Coalition's head of research.
"One of them is inventory financing revenue. If you look at the Asian revenue for commodities, we've seen an increase compared to the global decrease," he told Reuters.
Standard Chartered (STAN.L), Standard Bank (SBKJ.J) and Deutsche Bank (DBKGn.DE) are leaders in inventory financing, in which short-term loans are provided for producers while commodities are transported to buyers, industry sources said.
While the overall shift of global manufacturing to Asia has fuelled the appetite for commodity financing, internal banking dynamics have also boosted trade revenue for some banks.
A shift of financing activities within banks from traditional trade finance departments to commodity specialists is making possible larger packages and lower rates to clients such as copper producers.
Total commodity inventory financing in Asia is growing at about 10-20 percent a year and has expanded into a business where $15 billion to $20 billion of short-dated deals are in place at any one time, said Stuart Smith, head of commodities in Asia for Deutsche Bank in Singapore.
MORE AGGRESSIVE LENDING
"The new escalation (in inventory financing) is really the commodity banks coming in and lending slightly more aggressively against finished goods," he told Reuters.
While a general trade finance department might lend a client such as a Chilean copper producer about half the value of a cargo during the 40-50 days it takes to ship to China, commodity specialists in banks are often comfortable lending about twice as much or virtually the full value, Smith said.
That's because the bank would have confidence in selling the metal if it was forced to take control of the cargo used as collateral and liquidate it.
While commodity financing in Asia has been growing for years alongside the region's role as a manufacturing hub for the global economy, banks are placing more focus on it as other areas of commodities become more difficult.
Recognising the potential, Dutch bank ABN Amro ABRGPA.UL this month established an office in Singapore for commodity inventory financing of metals, agricultural products and oil.
"On the commodity trade finance side there is a lot of appetite. Banks are pulling out of commodity trading but not out of commodity trade finance. There is still good demand from clients for this," Piet-Hein Ingen Housz, global head of metals commodities at the bank, told Reuters.
Deutsche, Germany's largest bank, focuses on base metals, iron ore and coal.
While major U.S. banks have pulled out of propriety commodity trading and have put up for sale physical businesses due to tighter regulations, inventory financing is not an issue for the watchdogs. "I find that trade finance is one of the areas that regulators are fairly comfortable with," Smith said.
(Additional reporting by Melanie Burton in Singapore and Harpreet Bhal in London; editing by James Jukwey)