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Paradigm Shift: From Trade Finance to Supply Chain Finance

Frankfurt May 2010

CONFIDENTIAL

Yang Liu

2 Source: Maravon

Theses

To persist Trade Finance leadership in China in the long-term, Chinese banks should start leveraging their offshore offices for introducing Cross(X)-Border-SCF by taking four measures:

•  Check bank-internal capabilities for X-Border-SCF

•  Develop bank specific X-Border-SCF concept

•  Implement appropriate X-Border-SCF software and prepare both head office and offshore offices for X-Border-SCF activities

2

Trade Finance evolves more and more into a Supply Chain Finance (SCF)-business with major banks starting to target China as the next big SCF-market 1

3 Source: Maravon

Theses

To persist Trade Finance leadership in China in the long-term, Chinese banks should start leveraging their offshore offices for introducing Cross(X)-Border-SCF by taking four measures:

•  Check bank-internal capabilities for X-Border-SCF

•  Develop bank specific X-Border-SCF concept

•  Implement appropriate X-Border-SCF software and prepare both head office and offshore offices for X-Border-SCF activities

2

Trade Finance evolves more and more into a Supply Chain Finance (SCF)-business with major banks starting to target China as the next big SCF-market 1

4 Source: Maravon

Trade between China and Germany has been increasing tremendously over the past 10 years CHINESE-GERMAN FOREIGN TRADE DEVELOPMENT

Exports to China Imports from China

in Billion EUR

260%

199%

9 12 15 18 21 21

27 30 34 36

2000 2002 2004 2006 2008

19 20 21 26

33

41

50 56

61 55

2000 2002 2004 2006 2008

5 5

The way how Transaction banks exploit international trade for Trade Finance is changing

Source: Maravon

TRADITIONAL TRADE FINANCE VS. SUPPLY CHAIN FINANCE

Traditional Trade Finance Supply Chain Finance

Portfolio Receivable Financing

Winning mandate to finance recei-vables portfolio of a company’s suppliers over the next 5 years

Increase number of SCF-programs

Products

Strategy

Objective

Single export or import LC’s and guarantees

Winning financing deal per export or import transaction

Increase Trade Finance transaction number

Time consuming sales per transaction

necessary

Total Market for Trade Finance Business

Supply Chain Finance

Single- Deal traditonal Trade Finance Transactions

Once a SCF mandate is closed, there is no more trade finance business with other products possible for any other bank

6 Source: Maravon

Supply Chain Finance Explained ILLUSTRATION ON FLIPCHART

What is Supply Chain Finance?

•  Workflow? •  Benefits?

Explanation on Flipchart

8 Source: Maravon Research

Profits in SCF are higher if credit spreads between buyers and suppliers are bigger SCF-PROFIT POTENTIAL

EXAMPLE

Rule of Thumb for SCF-Market Evaluation Example:

SCF-Profit Potential

SCF-Volume p.a.

1 – Operational Cost in %

1 – Buyer Profit in %

Buyer-CDS – Ø Supplier-Portfolio-CDS

EUR 250m

98%

95%

...

Ø CDS- Difference

in bps

USA

UK

Brazil

Poland

Malysia

China

Greece

SCF-Profit Potential in Mio. EUR

Illustrative Supplier Portfolio from

26.1

4.2

3.3

1.9

1.4

0.5

0.2

1,120

180

140

80

60

20

10

...

9 Source: Maravon

Theses

To persist Trade Finance leadership in China in the long-term, Chinese banks should start leveraging their offshore offices for introducing Cross(X)-Border-SCF by taking four measures:

•  Check bank-internal capabilities for X-Border-SCF

•  Develop bank specific X-Border-SCF concept

•  Implement appropriate X-Border-SCF software and prepare both head office and offshore offices for X-Border-SCF activities

2

Trade Finance evolves more and more into a Supply Chain Finance (SCF)-business with major banks starting to target China as the next big SCF-market 1

10

Source: Maravon Research

To compete with major Transaction Banks Chinese banks should get prepared for X-Border-SCF by leveraging their offshore offices SUGGESTED NECESSARY ACTIVITIES

Activities for X-Border-SCF-Preparation

A

B

C

D

Check bank-internal capabilities for X-Border-SCF

Develop bank-specific X-Border-SCF concept

Implement appropriate X-Border-SCF software

Prepare head office and offshore offices for X-Border-SCF

Result: Persisted China-related Trade Finance Leadership

11 Source: Maravon

BANK-INTERNAL X-BORDER-SCF CAPABILITIES CHECK

Don’t reinvent the wheel: For SCF often many internal building blocks can be used already – missing ones need to be identified

A ILLUSTRATIVE

Criteria Required Measures

Product Management •  Framework Contract Adapt for each buyer country

•  International Documentation Coordinate with local legal department

•  Responsibilities Assign managers for each task

•  SCF-Platform & Technology Build interfaces to subsystems X and Y

Sales/Marketing •  Access and Relations to Buyers Initiate client building activities

•  Access and Relations to Suppliers Leverage local branch network

•  Pricing Align pricing toward refinancing and risk exposure

•  Market Coverage …

Risk Management/Compliance •  Credit Risk Mgmt. for Buyers (in offshore countries) …

•  “Know Your Clients” (KYC) …

Processing

•  Collection …

•  Cash Management …

•  “Anti Money Laundering” (AML) …

•  Confirmation …

1 2 3 4 5 6

Not available

Fully up and running

12 Source: Maravon

BANK-SPECIFIC X-BORDER-SCF CONCEPT DEVELOPMENT

The bank-specific X-Border-SCF-concept should be derived from the corresponding bank’s core competencies

B

Cross-Border-SCF concept

•  Product Design

•  Technology Platform

•  Market Management

•  Risk Management

•  Operations/Processing

•  Accounting

•  MIS & Performance Control

Working out core competencies

•  Strategy ­  Client segmentation and penetration method ­  Product template definition ­  Regional concentration ­  Technological positioning

•  Organisation ­  Use of internal resources and expertise ­  Creation of a powerful SCF-team organisation

•  Methods & Processes ­  Conceptualisation of credit risk assessments ­  Conceptualisation of receivables assignments ­  Development of risk-adjusted SCF-pricing tools ­  Explanation of international SCF-accounting

•  Systems ­  Electronic Invoice Presentment Systems ­  Confirmation management ­  Collection and cash management systems

Live SCF

13 Source: Maravon

X-BORDER-SCF SOFTWARE IMPLEMENTATION

Seamless SCF-solutions require appropriate software and security standards

C ILLUSTRATIVE

Test and run/ pilot set-up

Customize Software

Select/Build Software

Analyse system and security requirements

Define „Must-have“ Standards

X-Border-SCF software implementation

X-Border-SCF software platform requirement

SCF Administration

Electronic Invoice

Presentment

Electronic Invoice

Acceptance

Risk-adjusted Receivables Financing

Pricing

Automated Receivables Discounting

Collection & Cash

Management

14 Source: Maravon

LEADING ROLE OF OFFSHORE OFFICES IN X-BORDER SCF BUSINESS MODEL

People in the offshore office can win the buyers as key mandate most efficiently to get the developed concept fully up and running

D High Medium Low

Way to win buyers as key mandate

Head Office

Head Office

Product Expertise

Existing direct contact

Knowledge local market Efficiency

Buyers

Buyers

Suppliers Buyers

Offshore Offices

15 Source: Maravon

PREPARATION OF HEADQUARTERS AND OFFSHORE OFFICES FOR X-BORDER-SCF

People in head office and in the offshore offices must be enabled to make processes work

D

Enables

Internal Processes

•  Manuals

•  Workshops

•  Mentoring

•  Training-on-the-job

Contracting & Documen-tation

Offshore Office

Negotiations & Deal Closing

Client Pitches

Pricing

Head Office

Credit Risk Assessment

Platform Provision

X-Border-SCF

Execution Process

16 Source: Maravon Research

Where could Maravon help you? MARAVON SUPPORT CAPABILITIES Partial Support

Full Support

Maravon’s Support

Capabilities Activities

1

2

3

4

Check bank-internal capabilities for X-Border-SCF

Develop bank-specific X-Border-SCF concept

Implement appropriate X-Border-SCF software

Prepare head office and offshore offices for X-Border-SCF

•  Software selection

•  Customisation support

•  Interface programming

17 Source: Maravon

Summary

I Despite international trade has been dampened by the financial crisis exports to and imports from China are expected to grow further

Major transaction banks increasingly use Supply Chain Finance-offerings to capture trade finance market share from their competitors over years. The early bird catches the worm

Ⅱ

Cross-Border-SCF business with Chinese suppliers promise high profits. This fact is supposed to encourage major transaction banks to build China-related SCF-offerings soon

Ⅲ

Chinese banks should use their offshore presence, e.g. in Germany, and build out their Cross-Border-SCF capabilities in order to exploit the China-related Cross-Border-SCF opportunities themselves

Ⅳ