US: Credit Market

Latin American Banks Cozy Up to Asia Amid Turmoil

Market turmoil in Europe and the U.S. may have made financial institutions in Asia—particularly China—even more attractive sources of credit for Latin American banks.

“Asian banks may be able to fill the gap that's caused by the instability in the U.S. and Europe,” said Antonio Alves, senior regional head of short-term finance for Latin America at the International Finance Corp. (IFC). “Asia is not immune but it's less affected [by market turmoil].”

Banco Pine Headquarters, Brazil
Source: Banco Pine

Business ties between China and Latin America had been growing rapidly long before the recent market volatility in Europe and the U.S. China's strong demand for natural resources in recent years has helped fuel Latin America's growth. China is now one of the top two trade partners for many Latin American countries, including Argentina, Brazil, Chile, Colombia, Panama, and Peru.

Mutual interest in each region may increase further on the back of escalating sovereign debtconcerns in Europe, and market swings not seen since 2008.

“Normally, the Brazilian banks, when they start their international activities, they start a relationship with the more traditional players—European and US banks—Deutsche Bank, Santander, Wells Fargo, Citi , JPMorgan ,” said Angela Martins, an executive director at Brazilian bank Banco Pine. “Of course because of the situation in Europe, we’re trying to diversify even more our sources of funding—so where are there more sources of liquidity? Asia.”

Problems in Europe have reduced the number of banks that can supply funding to Brazilian banks at reasonable prices, she added. Banco Pine is currently in talks with banks in both Singapore and Hong Kong.

“Asia is doing fine. China is growing substantially. Other countries, like Singapore or Korea, are doing better than the European countries,” she said.

Although Martins does not anticipate a reduction in credit coming from the U.S., some industry experts note that U.S. financial institutions are becoming increasingly more hesitant to lend to Latin American banks.

“I've been seeing a more cautious approach with emerging market banks, including Brazilian banks, when I offer a deal to the U.S. bank,” said International Finance's Alves. “They tell me 'I’m not interested.' The bottom line is because of the volatility in the market—the funding cost is going up, or there are more restrictions or lack of motivation to lend to emerging market countries.”

Plus, growth in BRICcountries and changes in valuations after the 2008 financial crisis have altered the ranking of the world’s top 10 banks by market capitalization. Of the 10 today, four are Chinese and one is Brazilian. The remainder are American banks, with one European/Asian bank (HSBC).

Ten years ago that list was comprised exclusively of U.S., European, and Japanese banks, said John Weinshank, head of trade finance and corporate banking at China Construction Bank.

“The days of relying on the European and U.S. banks to handle emerging market banks’ liquidity needs are gone,” he said. “There’s just too much uncertainty there. People need to look to Asia to diversify their liquidity needs, not just China, [but] the whole region—the banks there are fairly sound.”

One metric of correspondent banking between Latin America and Asia is the use of guarantees by the IFC. The private arm of the World Bank aims to increase access to trade finance credit lines for emerging market banks with Organization for Economic Co-operation and Development (OECD) countries by using the IFC guarantee as a risk-mitigation tool. However, with increasing interest between Latin America and Asia, the IFC has been working to help banks in both regions work together more frequently.

IFC facilitated the first trade finance deal between China Construction Bank and Multibank of Panama in 2010. The first deal was completed in December 2010, an import finance of $2 million for a six-month period, where China Construction Bank was the lender under IFC’s 100 percent triple-A credit risk coverage. The second deal was done in June 2011, another import finance deal of $1.5 million for a one-year period.

“We’re conservative banks, and this is our first foray into Latin America,” said China Construction Bank's Weinshank. “[With the IFC guarantee] you’re taking a double-B risk and supplanting that with a triple-A risk.”

Currently, a fair share of deals between Latin American and Asian banks are mediated by U.S. corporations at a cost. But Latin American financial institutions are increasingly eager to establish a direct line with Chinese Banks to make a deal speedier and cheaper, the IFC’s Alves pointed out. IFC guarantees between Latin America and China shot up 93 percent between 2007 and 2011. For Asia as a whole, that figure jumped to 98 percent for that same period.

Despite considerable geographical distances, high communication costs, diametrical time zones, and language and cultural differences, those figures are expected to grow.

“I see a mutual interest for Latin America and China to work together,” said Alves. “But it's not as straight forward.”

For one, Chinese banks don’t borrow in LIBOR. Plus, the Chinese renminbi (RMB) and U.S. dollar exchange rate make borrowing costs in U.S. dollars pricier for Chinese banks.

“If they were in RMB, we’d be very interested,” says Weinshank of China Construction Bank. “I think the Chinese banks would be a lot more interested.”