Paul LeBlanc, Senior Vice-President, Trade Services and Financial Institutions at Scotiabank.

Podcast Transcript

FRED KETCHEN: Welcome to the Scotiabank podcast. I’m Fred Ketchen, Director of Stock Trading for Scotia McLeod. These regular podcasts call on some of Scotiabank's most knowledgeable thought leaders to help you make sense of it all. And here we’ll discuss strategies designed to put you in the financial driver’s seat. In this podcast, we’ll focus on how trade services can help organizations with their working capital and risk management.

Joining us today is Paul LeBlanc, Senior Vice-President, Trade Services and Financial Institutions, Global Transaction Banking at Scotiabank.

PAUL LEBLANC: Well, first Fred I’d have to say there’s nothing typical about trade finance customers. They come in all shapes and sizes.

I know small business entrepreneurs. For example, there’s a fellow who has a company, he’s got exclusive rights to a foreign product for firefighting equipment and he distributes it across Canada. He imports goods, distributes it and he’s focussed on his cash flow as it goes through that cycle.

I know another large manufacturer, a customer of ours that manufactures tortillas and ships them throughout the Americas. There’s agri co-op customers. They take agri products and they ship them around the world. On the other hand, you can also have engineering or construction companies who are bidding on projects again around the world.

The one common denominator with all those customers is they’re doing business across borders. They’re importing and exporting or exporting and importing, materials, services, but it’s always across borders.

FRED KETCHEN: Could you explain some of the reasons why a customer would go to a bank to support their trade needs?

PAUL LEBLANC: Sure, the first need that they have of course is to effect a payment. Because it’s cross border, it’s not simply a matter of writing a cheque on your Canadian dollar account and sticking it in the mail. So, there is a need for affecting a payment, affecting a foreign currency conversion to make that payment and of course they’re interested in expediting the collection of the receivable as quickly as possible so they’ll go to their bank for that.

The other purpose that they have for using a bank is to help manage risk. There’s counter party risk. The person that you’re selling to may not be well known to you so do you want to assume the credit risk that you are actually going to get paid when your goods arrive there? They will use a bank to help with that process.

And there’s also, as I said earlier, the foreign exchange exposure that they’ll want to manage. If they know that they’ve got a payment in a foreign currency at a future date, they may want to hedge that exposure and the banks can certainly help them in that regard.

And then the final step is to optimize working capital or accelerate cash flows and banks do that in a variety of ways. They provide pre-shipment financing, they provide receivable purchase facilities and they provide buyer credit facilities.

FRED KETCHEN: So basically what you’re saying is that the manufacturer, servicer or whoever it is, he’s shifting the risk from himself to the bank?

PAUL LEBLANC: Absolutely correct.

FRED KETCHEN: Can any bank provide trade services to their customers?

PAUL LEBLANC: Most of the Canadian banks, certainly do provide trade services to their customers. There may be a variety in terms of the product mix that they bring to the customers. But the unique feature that we have at Scotiabank, the thing that differentiates us from the other Canadian banks, is our international network and how that plays in trade is very, very important.

Most of the other banks would have to hand off the transaction to a correspondent to complete the transaction in the counterparty’s country. Being in over 50 countries around the world gives us an opportunity to keep that in the family, so to speak, and make sure that we service both ends of the transaction.

That having been said, there are a number of countries where we don’t have a presence and, in that case, we usually have rep[resentative] offices in key markets. For example, we have rep offices in Brazil and Turkey, in Russia and in Vietnam and again, those rep offices, because they’re in the local market place, they know which banks are efficient in this sort of business. They built relationships with them and will work with those correspondents to get the job done.

You know Fred, trade is in our DNA. It’s been a part of what we’ve done from the day we became a bank over a 175 years ago. We were a merchant bank, we were a trade bank and we continue to be one. In fact, we opened our branch in Jamaica before we had a branch here in Toronto, because we were following trade flows through the Americas into the Caribbean.

Scotiabank is a well-capitalized bank with a strong risk management culture and that’s what’s positioned us so well to help manage our trade risks for our customers. And I’m very proud of the fact that our bank has been selected four out of the last five years as the best Trade [Finance] Bank in Canada by Global Finance magazine.

FRED KETCHEN: And I would agree that I think it’s something to be very proud of and you’ve worked hard at it and you deserve that kind of recognition. Has the recent economic uncertainty changed your customers’ trade finance needs?

PAUL LEBLANC: Absolutely. There have been a number of changes that have evolved both at the start of the crisis, through the crises and post crises. So pre-crisis, we saw a movement away from letters of credit into open account. And the reason for that was the world was getting smaller, people felt that they knew their trading partners much better so they were willing to take that risk away from the bank and absorb it themselves. But during the crisis, while absolute volume of trade dropped, we did see an increase in the request for financing of LCs. And I think that that was driven by companies needs to raise working capital. Find new opportunities to do that because traditional sources had dried up. So one of them was to go back to LCs, take the LC to the bank and ask the bank to finance the transaction.

FRED KETCHEN: LC is...

PAUL LEBLANC: Sorry, letter of credit.

FRED KETCHEN: Good. Thank you.

PAUL LEBLANC: And, for bankers ourselves the crisis caused a change. We became much, much more focused in markets where we didn’t have a presence on really knowing the financial institution that was concluding the transaction with us or was the counterparty for us in the transaction. So we became much, much more focused on our correspondent bank network and the strength of each individual member in that network.

Now, as we emerge post crisis, I do think we’re going to see a return back to open account. Again our customer’s focus will move away from risk management and back into working capital and optimizing cash flows. And so as a result of that we will see the move back to open account. We will see and in fact are seeing an increased demand for receivable purchase facilities along those lines.

But whether it’s pre-crisis, post-crisis, there’s been a fundamental evolutionary change in trade business that’s been happening over a period of time. The internet has facilitated that and it’s all about speed of processing – it’s how quickly can a customer get his goods from point A to point B. How can they minimize the size of shipment so they don’t have a lot of inventory sitting around, and reduce the shelf space of that inventory? How do they optimize cash flows and at the end of the day make sure that the money going out, goes out at the last possible minute and the money coming in comes in as quickly as it can?

FRED KETCHEN: Paul, can you share some examples of how trade finance can help customers manage their working capital and any solutions that are increasingly in demand?

PAUL LEBLANC: With pleasure Fred. If I go back in the market segments and the case of the importer, my friend with his fire extinguishers whose distributing them across Canada. LCs, [or] letters of credit, can assist the importer in obtaining longer payment terms from his supplier. And through term LCs, we get the opportunity for him to delay the payments and we also provide the opportunity for financing the pre-shipment of that transaction.

In the case of exporters, banks can pay the exporter upon the shipment of the goods rather than waiting for the goods to arrive in the country where they’re being shipped to and then having the importer effect the payment. So, we do the administrative follow-up. We manage with the importer’s bank that payment transaction. And it’s at an agreed upon time, sometime after the goods have been shipped.

The other thing that we do is we help maximize cash flow as I said earlier. And we do that by extending credit through accounts payable timetables and we reduce the account receivables timetable by providing receivable purchasing facilities.

Remember that engineering or construction company that I spoke of earlier? Well, they also have needs. And the way we help them is as they bid on cross-border opportunities. Usually the local person that is hiring that construction company or that engineering firm will insist upon a performance guarantee. And they will usually want that to come from a bank in their local market. So again, with our presence in a number of different countries, we’re usually able to provide that ourselves, guaranteeing our customer in the home country’s performance against that opportunity.

A recent example of that would be one that we’ve done. Because of our presence in Panama, we were able to provide performance guarantees for a consortium of companies that are working on the expansion of the Panama Canal.

And then the other aspect is we’ve seen more and more multinational companies emerge where they’ve got subsidiaries around the world. And, for that subsidiary, they find funding in its local market, they usually require a financial standby letter of credit, which guarantees their obligations and assists them in obtaining that local funding. So again, Scotiabank will provide that for our key customers.

The other thing is – very topically you see it at conferences on trade, you read about it in magazines – and that’s the concept of the convergence of cash management and trade finance. I don’t think that this is a new concept. From the beginning of time, there’s always been a payment. The change is that from a customer’s perspective he doesn’t look at his bank to say “I’m here to buy cash management products today, I’m here to buy trade finance products today or I’m here to buy foreign exchange products today.” They’re looking for a seamless and integrated solution that helps them manage their cash flows and they’re not product focused, they’re really looking at it for solutions.

So the banks have stepped up in that way and they have started building products and services that are end-to-end. Our electronic products do that, we have automated processes that help reduce costs and improve efficiency. And here at Scotiabank, we’ve got a dedicated group called Global Transaction Banking. We have worked very closely with our customers’ relationship managers. We have a sales team dedicated for cash, trade, and foreign exchange. We have product specialists working together to provide those solutions to both domestic customers and multinational customers, wherever they do business.

FRED KETCHEN: Thank you Paul for sharing your insights with us today and we hope that the information in this podcast will help our business listeners with their working capital and trade needs.

Thank you for joining us. I’m Fred Ketchen. For more information on our trade services, please visit us at www.scotiabank.com