Since June, the
outcome of the EU Referendum has dominated headlines – and the thoughts of
financial services professionals and business leaders worldwide. Although the
historic vote to leave the EU may have presented some organisations with
challenges, Lloyds Bank believes there are opportunities for businesses and financial
institutions to work in partnership to ensure the future of British trade
across the globe.
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. Although Article 50 will be triggered by the end of March 2017 it is
unclear yet 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 below). 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%. This did not
stop supermarket giant Tesco and the UK's largest food manufacturer, Unilever, becoming
embroiled in a battle over wholesale prices. The latter sought to raise its
prices by about ten percent to offset the higher cost of imported commodities.
Tesco offered a very public resistance to this move by its supplier.
Although this particular confrontation was resolved, the overall picture
might appear somewhat challenging still. But there is often opportunity to be
found too. 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. There is also an opportunity for UK businesses to benefit from
increased tourist spending. Burberry has seen like-for-like sales climb by more
than 30 percent in the three months to 30th September after the
falling pound saw overseas shoppers increase their purchasing at a better
price. 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.
Supporting British business
One of the key ways that UK businesses can achieve
overseas success is to leverage the banking system and the way in which
financial institutions, including Lloyds Bank, have developed strategic partnerships.
Such partnerships not only include bodies such as Britain’s new Department for
International Trade, but also a network of trusted partner banks across the
globe.
By establishing these new partnerships and reinforcing
existing working arrangements with banks worldwide, British financial
institutions are able to support business clients as they export into new
territories. To be truly supportive of business though, such collaboration
needs 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 or supplier
base may come up against challenges at each step of the value chain, and will
require support to overcome them. This should be forthcoming as numerous new partnership
opportunities for UK and overseas financial institutions are brokered.
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 Pound’s value having fallen against a number of currencies,
European buyers further afield are likely to be hungry for high-quality cheaper
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 and their business
clients as working with UK financial institutions will resolve client trading
issues and lead to new business opportunities for those banks.
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, banks
will need to make available 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.
In order that trade relationships are maintained, optimal
working capital for both buyer and seller is essential. Partner banks also play
a key role in ensuring this is possible. Larger UK corporate buyers may look to
use solutions such as Supplier Finance or Bills of Exchange to help bolster their
suppliers’ working capital and underpin sourcing. This may require the help of
their UK bank to onboard suppliers globally, as well as to make payments into
new geographies, and mitigate risk – all of which will require access to 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. To assist, UK banks, such
as Lloyds Bank, should exhibit 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, it
is likely that more Import LCs will be requested by UK exporters to manage
buyers and/or sovereign risk. This will increase the UK banking sector’s need
to secure traditional trade business partnerships with overseas banks.
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 or 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 for business
Following the Referendum
and as Britain starts to negotiate its withdrawal from the EU, the corporate
community should continue to look for opportunities to prosper globally. The
facilitation of safe and efficient trade by financial institutions can help 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 thrive in this new paradigm.
This article is provided for information purposes only
and is not to be construed as regulatory, investment, legal, tax or accounting
advice nor should it be treated as an offer or solicitation to offer, to buy or
sell any product or enter into any transaction. The information and any
opinions in this article are subject to change at any time and Lloyds Bank is under
no obligation to inform any person of any such change. This article may refer
to future events which may or may not be within the control of Lloyds Bank, and
no representation or warranty, express or implied, is made as to whether or not
such an event will occur. If you receive information from us which is
inconsistent with other information which you have received from us, you should
refer this to your Lloyds Bank representative for clarification.
