EU REFERENDUM AND BRITISH TRADE contributed by Lloyds Bank

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 30^th 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.