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Europe's Banks Leave Room for Rivals to Fund World Trade

Euro zone banks have pulled back from the $18 trillion business of helping companies trade their goods around the world, opening the door for rivals to grab a slice of the growing market.

Euro zone banks have pulled back from the $18 trillion business of helping companies trade their goods around the world, opening the door for rivals to grab a slice of the growing market.

A German engineering firm selling machines to build roads in Brazil, sugar exporters and importers and dozens of firms making parts for Apple's iPads or iPhones depend on banks for loans, letters of credit and other documents to support their trade.

European banks have used their heritage to dominate trade financing but many are retrenching, hurt by the regional debt crisis and struggling to conform to tougher global rules.

New players are entering the business and existing ones are stepping up their efforts, trying to tap into the boom in trade between China, Brazil, the Middle East and other emerging markets that drives global economic growth.

"It has been one of the few areas of corporate and investment banking that has been growing," said Axel Miller, partner at consulting firm Oliver Wyman.

"It's an interesting product to expand from. Banks can accompany clients into new markets, increase lending in a broader sense, move into payments and cash management, and use it as an expansion route."

Citigroup CEO Vikram Pandit said European banks accounted for about 80 percent of world trade finance, when he set out plans earlier this year to grab more of the business.

But bankers say BNP Paribas, Societe Generale , Credit Agricole, BBVA and ING , have all pulled back as they tidy up their loan books.

This has left some $500 billion to $700 billion of trade unfinanced, according to one senior banker, creating space for rivals to step in.

Asia-focused HSBC and Standard Chartered, U.S. rivals JP Morgan, Citigroup and Wells Fargo , Japan's Sumitomo Mitsui and Mitsubishi UFJ Financial are taking the chance to pick up the slack.

Singapore's DBS Group, Australia & New Zealand Banking Group, Taiwan's Mega Financial and Chinese and Canadian lenders are also expected to benefit, bankers said.

BACK IN FASHION

For years trade finance has been an unfashionable part of banking, attracting little attention during the years when profits soared on the back of more complex and risky products.

The downside of the business has always been low margins. New global rules may force banks to hold five times as much capital to cover loans as they do now, squeezing profits even further.

But it is back in favor as a low risk, stable revenue in a volatile environment. Banks are eager for a share of an annual revenue pot of about $27 billion, according to Oliver Wyman estimates, and access to new markets.

"It's a nice fee earning business with very low default rates, especially if you have connectivity and can manage it effectively with low costs," said Chris Wheeler, banking analyst at Mediobanca.

"It also opens up the door for more activity around foreign exchange, swaps and more stuff for the client."

There were fewer than 3,000 defaults from 11.4 million trade finance deals, less than 0.03 percent, according to analysis by the International Chamber of Commerce.

It also typically involves modest exposures and are short-term, usually 180 days or less, and are collateralized against a product or shipment.

Banks are also keen to get exposure to trade between emerging markets, known as the "south/south trade". Consumer spending and infrastructure investment has stimulated imports and exports between Asian countries and Brazil is now China's largest trade partner.

Mid-sized U.S. and European companies are looking to those markets as alternatives to boost lackluster sales at home.

ASIAN GROWTH

HSBC is already the market leader with 9 percent of the global trade finance business and it has revved up its focus.

"I think the message got lost for a while. We've now set our stall out very clearly," said Alan Keir, head of HSBC's commercial bank.

HSBC said its trade finance revenues jumped 23 percent last year to $3.2 billion, helped by new deals in commodities.

Swiss banks are also expanding aggressively in commodity trade finance and lured top bankers away from retrenching French rivals.

Standard Chartered said its trade finance volume jumped by a quarter last year and drew in clients to other products. It has helped Unilever expand in Asia and India's Tata to invest in Britain.

ANZ said its trade finance revenue last year jumped 29 percent, with 58 percent growth in Asia.

Some banks, including several reigning in their business, are looking at new options, and may partner with other banks to provide funding or adopt new tactics to stretch their balance sheets less, bankers said.

BNP Paribas said it plans a fund for trade finance deals, opening a new class of loan to investors, and banks are also increasingly looking to securitize their trade loans. (Additional reporting by Martin de Sa'Pinto; Editing by Anna Willard)

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