PNC travels well: toothbrush, passport, due diligence��. When packing for a trip overseas, a loan needs a trusted advisor. PNC's team, headed by Harry G. Hayman III, has the experience and skill to smooth the way

Banking began its romance with international trade in the 19th century, as did a large part of the insurance industry, when traders needed to finance their ships' inventory as well as insure the cargo against loss. As countries started to trade for other than bartered goods, merchant bankers were able to get their credit accepted by trading partners around the world, which customers found a lot easier than lugging around gold bars that practically begged to be stolen. So what has changed in trade finance? What hasn't? And who's doing it?

The Export-Import Bank of the U.S. assists in financing exports of goods and services to the international community. Ex-Im Bank is not a competitor to commercial banks; rather, it exists to fill gaps in trade financing, such as letters of credit or insurance. One of the more than 70 Ex-Im Bank partners--and one of its largest is PNC Bank's International unit, under the direction of Harry G. Hayman III, senior vice president. In this interview, The RMA Journal brings together several members of Hayman's group to discuss risks, opportunities, and best practices in trade finance. You will meet Gerald Rama, Dave Ondo, Tony Giunta, Joe Reilly, and Kimberly Burdette. Not long into the interview, Gery Rama had to leave to close a complex deal the bank had been working on for several weeks. International trade has always been more complex than domestic trade and is rapidly becoming more so. There can be huge risks and expenses, and compliance issues alone can destroy a bank's efforts in the international arena. Any smaller institution seeking to help its clients grow, then, had better buy the expertise and other resources needed in a multitude of areas, not the least of which is due diligence, or find a partner bank that can help. On average, those working in international trade finance at PNC have 20 years of experience. Therein lies the substance of this interview: what it takes to succeed in international trade.

Martin: International trade is part of the foundation of the banking business. How is it changing?

Hayman: Although always a part of the banking business, international trade is more frequently becoming part of our customers' businesses. Approximately 20% of U.S. corporations are actively involved in international trade--about a 6% increase in recent years--and the higher complexity of international trade requires more assistance than domestic trade does. So increasingly, those banks wishing to serve as trusted advisor must be able to provide a strong international service to protect these customers from risks and to help them maximize their international trade.

Many of the risks in international trade are the same today as they were decades ago--for example, sovereign risk, risk of default, expropriation, dock strikes, and foreign exchange movements. World changes, though, are forcing a company to, for example, open a subsidiary in Asia to supply its customers who have a high degree of manufacturing there. So now the company not only is importing and exporting, it has an operation in another country, opening the door to many kinds of global regulations--foreign exchange, hiring, data security--that the company otherwise wouldn't be dealing with.

PNC assists its customers with offshore operations in terms of general advice and best practices for financial reporting, hedging of foreign exchange and liquidity risks, and reporting on cash balances, receivables, and other transactions that are housed in the subsidiary. In addition to our efforts, our overseas banking partners might arrange local currency financing, receivables discounting, or inventory financing for that subsidiary.

So it's not just that international trade is more complex. As a U.S. company establishes offshore subsidiaries, its own business model grows more complex. So we not only help the company with its financing needs, we also serve as a business consultant for whatever country they happen to be in.

Martin: Let's talk about how PNC's role has evolved.

Hayman: Our role has evolved and grown with our customers. You might expect to see more such activity in New Jersey, South Florida, Texas, California, and perhaps less in Nebraska and Kansas--yet there are major exporters of capital goods in the heartland as well. The international business is one of PNC's fastest-growing areas and is aligned with our relationship strategy and trusted-advisor objective. We work as a team with other areas of the bank--such as relationship groups, foreign exchange, and domestic cash management--to provide credit, domestic cash management services, private banking, leasing, and capital markets, as well as international services.

In addition, because the development of certain areas of a bank can offer a competitive advantage, we use international as a differentiator. The way the U.S. banking system has evolved, there are several giant banks and many small banks, but relatively few spanning that gap as we do. While some community banks offer excellent international services to their customer base, many others don't, and that's where our advantage lies. A number of our customers are companies that had dealt with community banks before but have grown to include more international activities. We also work with a dozen or more community banks as partners to provide those international services while the smaller bank maintains the relationship. Meanwhile, a large bank is working on, say, a $400 million power project in Pakistan, which not only is lucrative but also supports the bank's South Asian branch network. There just isn't the time available to work with the middle-market customer as effectively. Our focus, therefore, is very much on the small and medium size companies, and the smaller end of large corporate customers.

Martin: So as customers grow, trade is integrated into your overall platform of services. Has that always been the case, or is the push to do this more recent?

Hayman: The focus on international trade has come mostly within the past six or seven years, partly through existing customers' expansion into importing and exporting, and partly through PNC's acquisitions. International trade has always been a part of our bank history--in Pittsburgh, for example, our mining customers have demanded international services as they export their raw materials to other countries. When PNC purchased Midlantic Bank and Chemical Bank's southern New Jersey operations, though, we saw that perhaps 40% of those customers were involved in international trade. So we expanded and strengthened that area to meet the demand.

The Washington/Philadelphia/New York corridor has numerous companies that are major exporters and as many other companies that are major importers. In addition, many non-U.S, companies have established U.S. headquarters in this region. Certain areas of the country will, however, have far greater imports than exports, while others will be the opposite. New Jersey has more importing than exporting, while Philadelphia is fairly balanced. In general, the U.S. has done fairly well with service exports, but not as well as the U.K., for example.

Martin: Who are today's trade powerhouses?

Hayman: Clearly, China is one--a significant exporter as well as importer. India is having substantial growth and they have liberalized their trading restrictions. Many high-tech people are going back to start their own companies. Brazil is doing well, and much of their trade increase is going to China--agricultural commodities, iron ore, and manufactured goods, including airplanes. We're also definitely seeing more from Vietnam, and Mexico and Canada remain huge U.S. trading partners.

Martin: How does your group assist in the business development process within PNC? Do you make joint calls on clients with the bank's relationship managers?

Hayman: We joint-call and create joint target prospect lists with the relationship managers as well as the Foreign Exchange group. The end result is to place the credit side responsibility with the loan officer managing the relationship, and we manage the international relationship in conjunction with credit. The key is to deliver the full relationship strength of the bank to the prospect or customer.

Martin: RMA has been hearing from its members about an enhanced role for credit as a risk management function in partnerships with the business lines.

Hayman: Yes, and they certainly should be very active in the Risk Management Association to stay ahead of the game! We consider it to be a partnership between international trade and credit, but we look to the credit side to be very knowledgeable about all types of risk. We consider Credit Policy and the credit side of the bank as well as Compliance, to be major resources as we work to manage all of our risks well. Fortunately, PNC has an outstanding, group.

Burdette: In addition to other responsibilities with correspondent banking, my area looks at country risks. We differ from our domestic correspondent banking unit by looking out to the global market. As is true of other areas of credit, we manage concentrations and exposures and we balance our portfolio. Correspondent banking remains very traditional in the sense that correspondent bankers in foreign banks do the same thing I do in facilitating relationships between banks. If, say, a bank's foreign exchange area wants to get to know our foreign exchange area, we will facilitate the introduction and the dialogue; if there's an agreement, we also will facilitate the needed credit extensions. If they need some domestic treasury management services in the U.S., perhaps we'll facilitate the introduction into our bank or the other way around.

Hayman: For super-regional banks like PNC, success lies in having the expertise--the technical LC [letter of credit] knowledge or the technical structure of trade finance knowledge, the technical overseas finance knowledge, or the connection with the foreign correspondent bank or partner bank overseas. Experience and knowledge of products, foreign banks, and countries becomes critical, and that's really the differentiator.

Let's say we visited a customer and explained that we may not be Citigroup and we don't have a branch in the country they want to do business with, but we're really nice people. That seems a difficult sell. However, at a giant bank, that company could be the bank's 6,000th most important customer and not receive the full scope of the bank's resources. So we go into that company and let them know they are more important to us than they would be to a giant bank, and we assure them that we will commit our top experienced people to their trade finance needs, and aggressively use our overseas partner banks. Then it goes pretty well.

We work extraordinarily closely with the Export-Import Bank of the U.S., Dept. of Commerce, and Small Business Administration. As a matter of fact, we are one of the top three users of Ex-Im Bank. If you think of our strategy to support our corporate customer, this covers many areas. We are supporting U.S. exports, which creates U.S. jobs. We work with Ex-Im to mitigate the credit risk for our customers and for ourselves. It's a traditional PNC strength that has deepened in recent years.

Burdette: We recognize there are transactions coming into the bank that PNC is unable or unwilling to handle. Those transactions will come into my area, where we will look for another bank or partner, be it an Ex-Im Bank, a multinational insurer, or the a for-feit market to work with us. At the end of the day, we want to get the job done for the corporate customer.

Martin: I've been hearing from this group about the level of complexity in international trade.

Burdette: The complexity mounts when you realize that each party involved has its own set of lawyers. Within our group, a deal we're working on now has the buyer and its agent, the seller, and the bank we're selling the loan to. PNC areas that are involved include Letter of Credit, Trade Finance, and Domestic Relationship Management. There easily are 12 different parties within the bank alone involved in this one transaction. And as mentioned, then there are the lawyers. The structure we've created is a very good one that can help the customer significantly expand sales.

For capital goods exports, you typically provide five-year financing to a buyer in another country. Not many U.S. banks would be interested in doing such a transaction directly. Further, by using the Ex-Im program, the all-in cost is cheaper to the end buyer: if making the loan directly, the bank would be using LIBOR+6. Bear in mind that in its own country, the buyer could be paying 30% interest for 180-day financing--and that's assuming financing is even available. So the Ex-Im Bank is a viable method for providing financing that otherwise would not be available.

Hayman: Both PNC and Ex-Im Bank perform their own due diligence. If the transaction meets our criteria, we'll submit it to Ex-Im Bank. Ex-Im Bank then comes back with questions, just like a credit committee within a bank. When Ex-Im reaches the point where a credit meets their standards, they submit it for approval to their loan committee or board.

Martin: Is there a risk that a smaller institution beginning to work with Ex-Im Bank won't perform that due diligence, relying on Ex-Im Bank to do so?

Hayman: You hate to see a situation in which a smaller bank--trying to help its corporate customer do some transactions through Ex-Im Bank or with private insurance--hasn't performed the proper due diligence, doesn't have the correct documents, then later submits a claim and the claim is turned down. The bank not only loses money--it's out of the international business. You must have experienced people behind a transaction to ensure that it doesn't end badly. Over the years, there has been a steady increase in the list of steps we routinely perform to mitigate risk. And now, U.S. counsel reviews each PNC international transaction in addition to local counsel and Bob Mayer, our head of Trade Finance. If you're going to do the business, you really need the people who can ensure you're doing it all correctly.

Martin: Regulators are frequently warning smaller institutions that enter the loan syndication market to do their own due diligence. I don't recall hearing that message broadcast as clearly in regard to Ex-Im financing.

Hayman: When a smaller bank calls us because it is thinking about setting up an international division, we give just that message. Then there is the constant monitoring to do after the deal closes. Just one of the 50 or so points an institution needs to know about Ex-Im Bank trade policy is that if the customer makes a shipment to the buyer but one of the other shipments to that buyer is past due by a day, that transaction may not be insured. The bank must have a process in place to ensure it can address each of those 50 points.

Imagine what it must be like for a bank when Ex-Im Bank says it cannot pay a claim because the policy was violated. If I worked at a smaller bank, I'd make sure I had an arrangement with a larger institution that has a strong relationship with Ex-Im Bank and have that institution double-check the documentation and monitor the loan. The smaller institution will still make a profit, but the overriding reason to do this is to keep the relationship with the customer while avoiding the risk.

Martin: Let's say systems, processes, and people are in place, and you have a platform you're comfortable with. You're still dependent on the economic environment. So how do you manage that?

Hayman: In the current environment, from the export side, the lower value of the dollar and lower interest rates help the U.S. be competitive. But with a current account deficit of $600 billion a year, we're clearly not doing as much exporting as we would like to. Yet the weak dollar has allowed the U.S. to reclaim markets it had lost.

Martin: The trade deficit is a huge issue. What do you do about that?

Hayman: Overall, the funding of U.S. debt by the Chinese and the Japanese is a macro issue, and we're concerned about it. Resolution will require fundamental restructuring of the U.S. economy.

For the moment, from the export side, if you assume interest rates will rise and the dollar grows stronger, which it should if interest rates rise, then we hope that a customer that has an established export business in, say, Brazil, will have proven its products or services and be able at least to maintain, if not grow, the business there. It helps from the U.S. standpoint to have had several years of reasonably good growth on the export side.

Martin: What is "reasonably" good growth?

Hayman: If you look at export statistics [see www.export.gov/tradestatistics.html] for manufactured goods classifications [unstats.un.org/unsd/cr/registry/regcst.asp?Cl=14], you'll see exports are up a few percent--but why aren't they up 15% with the relatively low value of the dollar? This should have been our chance to skyrocket.

Some will point to the level of U.S. manufacturing now conducted in Taiwan, Singapore, etc., and say there's not much to export anymore. The capacity for U.S.-manufactured exports may not be adequate for our country's needs.

Martin: How have technological advances changed the way PNC delivers trade services?

Ondo: The single largest advance in international trade has been the Internet, which has opened communication and delivery channels for our products. In the past three years, we've invested a lot of time and money into Internet delivery from our back office to our clients to achieve more delivery, a greater flow of information, and the capability of linking in with other technology being developed in other delivery platforms in the international trade arena.

We've been talking with a number of vendors about their supply-chain management solutions that will allow us to more holistically manage the trade transaction across the globe--not just from our individual importer or exporter here in the U.S., but also the entire information flow from the freight forward, to the shipper, to the buyer or seller overseas, to the agents, and so forth. While this is still a very paper intensive environment, we sec some of the legal and industry practice precedent being set and the electronic capabilities are there.

Martin: Do you think electronification in trade finance is behind the curve as opposed to other areas of banking?

Ondo: Much of that has to do with the traditional exchange of documents and security. To ensure you are paid, you want an exchange of complying documents in a secure format.

Giunta: LCs are quite diverse internationally, and so there are many different laws to deal with. There are so many legal aspects to title documents, for example, that despite the time and effort put into this to date, we still have a long way to go. We've been working at this for a long time, but there are still many barriers.

Ondo: Some banks with a large clientele have invested heavily to develop their own network solutions. Many other banks, however, don't have the size or breadth to do that. That's where many alternative solutions are beginning to spring up as a result of the Internet. Technology software companies are now seeing the opportunity to drive the costs down to provide those benefits.

Burdette: PNC was ranked #1 in the financial services industry in delivery solutions, so that speaks to what we do across the board as opposed to just the international products and services we provide.

Reilly: And this all makes it easier for us to sell our products and provide a complete customer solution.

Martin: Trade finance has probably always had a higher degree of operational risk because of the complexity we've been talking about--payment systems risks, documentation issues, human error, fraud, and so on.

Ondo: Before dealing with operational risks, you must identify them, and much of that ability comes with the experience of seeing transactions. We analyze our transaction both from inherent risks of documentary presentation, to setting up and drafting the transaction. We look at exchange risk as we manage the payment for the client. We need the appropriate controls both in our shop as well as our client's, so many of our process procedures involve dual controls--both systemic and human. A bank must look again and again to ensure all the i's are dotted and the t's crossed.

Giunta: If you put greater focus on preserving the integrity of the LC and make sure you structure it correctly, you're less apt to have trouble later. Traditionally, an LC has been viewed basically as a tool to finance trade or as a payment mechanism. That's becoming more of a secondary thing to people wanting to use it as protection to make a payment. We need to change that focus to go back to seeing the LC as a primary payment vehicle. If we make sure we structure and issue credits correctly, we will have fewer and fewer issues.

Martin: Who do you see as now looking at becoming active in international trade finance?

Hayman: A number of banks are now approaching $6 billion or $8 billion in asset size. Also, a $2 billion bank will have a fair number of international transactions in a week. A number of corporate clients are involved in international activities, and they're probably your major customers. Those banks clearly are at the point of deciding whether to provide international services on their own, or partner with another institution. They can't just tell the customer they can't do it because there are too many government regulations. The customer will reply, so why do I need you? Just to hold my deposits? As you approach that size, you need to have a strategy for a customer solution.

Ondo: If you're going to try to set up an operation, you must have at least a year of observing and working with an operation before attempting to do it on your own. Even at that, you're focusing just on one aspect of trade finance. Once you begin to expand to include other areas, you're talking about the need for at least five to seven years of experience before knowing enough to make decisions on your own.

Giunta: You have to pay the salaries to get that experience. So if you want to start in this business, you either pay or begin a very good training program so people at the lower levels can begin to learn certain aspects. Even then, however, there are drawbacks: you want to focus on the customer, and suddenly you're bringing in a different person to do each part of the job. Every time that customer needs to speak with someone to do another piece of it, the customer is talking to a different person.

Hayman: Also, you must know exactly what your objective is before beginning an international trade finance area. It's fine if your objective is to provide a good level of service to a corporate customer. But are you also willing and able to take on the risks? And do you know what those risks are? Do you have the people and processes in place to mitigate those risks?

Martin: What would you consider to be best practices with respect to managing the risks relative to your foreign correspondent banks?

Burdette: First and foremost is to know your customer. You can use various knowledge sources--aceto-face, third parties, information services, other entities such as a central bank or regulatory agency--but you must truly know the customer.

Ondo: That's important for the "decline" piece of it. Then you roll into the transaction piece, which requires understanding the details and requirements underlying the transaction. And then you must understand the industry practices and guidelines for handling those transactions. In our case, we've trained our folks in the appropriate guidelines used within the international trade industry--to examine and issue credits--so we're sure we have the appropriate level of preventative and detective controls from the transactions before we put the client or ourselves at risk. Then there are the many levels of regulatory compliance to contend with.

Martin: How have anti-money-laundering regulations, the Patriot Act, and other anti-terrorism-related regulations changed the way you do business? How have these regulations altered how you allot your time?

Ondo: Anyone looking to get into this business must understand the reporting risks and obligations. Time that I used to spend in product development and client relationship management has necessarily given way to time spent on compliance. Ninety percent of my time now is devoted to managing risk in view of Sarbanes-Oxley or government regulation controls, such as OFAC (Office of Foreign Assets Control), BSA (Bank Secrecy Act), and the Patriot Act. That involves reporting, management, and training and development of staff. Before 9/11, it was probably more like 50%.

Giunta: Where once we held seminars with customers to discuss the flow of LCs and how they worked, we now hold them to discuss compliance issues. A few years ago we would give someone all the information for documentary collections over the phone and we would go from there, and now it's necessary to check all the government regulations as well. Sometimes you have to tell a customer you cannot do something for them that you could do before.

Ondo: Anyone getting into this business must look at how they will filter, or review, their transactions. The credits are lengthy for trade services, and you need to be able to review all that text within the credit according to your OFAC status. We've invested in automated filter processes around OFAC to help in our turnaround, but there are costs to the client as well. We may be unable to meet former turnaround times.

Giunta: Filters have their limitations as well. When I receive the document, I still must do a validation of that party. So the filter helps but is not the entire answer.

Burdette: My area's emphasis is now on those same compliance issues, whereas five years ago the emphasis was very focused on credit. Today, before you even approach the credit part of the transaction, there's the compliance piece--who are they, what are they, and what are they doing. You must know if you know enough to further your relationship with the client from point A to point B. Undoubtedly, there is an opportunity cost and an expertise level that just now is being developed. Many vendors are coming up with products to help financial institutions address these issues, but we're still in the early stages of knowing how well they work.

Hayman: International trade finance is an essential and growing component of many banks' relationship strategy. Beside the importance of maintaining a relationship with your growing customer, international trade has proven lucrative. No bank, however, can afford to be pulled into international finance simply because one of its larger customers now is exporting or importing. The risks are large and growing: compliance risk alone can consume massive amounts of time and resources, and the complexities of international trade demand experience. And as helpful as an organization such as Ex-Im Bank may be, no bank can assume that its risk is being assumed by Ex-Im. So I would say this to banks now at a crossroad: You have choices. If your bank's strategy causes you to choose to set up your own unit, be prepared to invest in the resources needed to have all systems and people in place, know your customer and the requirements well, and remember that monitoring is ongoing. This choice will make sense for some banks more than others, depending on the export/import complexion of their region and the number of customers they have doing business overseas. If your business strategy is to retain a few valued customer relationships, you can choose to partner with another institution that already has everything in place to help mitigate much of the risk. And: either way, take advantage of your RMA membership.

Contact Pare Martin by e-mail at [email protected].

Meet the Team: Gerald F. Rama (left) is SVP and Deputy Group Head, Global Treasury Management. Rama's expertise is in structuring cross-border loans and in risk mitigation. Kimberly Burdette, VP and Manager, Global Treasury Management, is responsible for the International Correspondent Banking group, managing the relationships with foreign banks at the PNC level, whether as a buyer or a provider of services, including credit extensions and/or monitoring. Those foreign banks may serve as an extension to provide any services that PNC cannot provide to a PNC customer in the foreign country, allowing the bank to develop or further a relationship with a customer overseas. The group also identifies and monitors country risks. C. Anthony Giunta, VP, Site Manager, Trade Service Operations, is responsible for the trade service documentary or commercial side of the business, providing letters of credit, collections and banker's acceptances for PNC corporate and bank clients. Harry G. Hayman III, SVP, leads the Global Treasury Management Group. David D. Ondo, VP, Global Treasury Management, is responsible for the Product and Trade Service Operations group, working closely with Trade Service Operations in managing PNC's client service delivery model in terms structuring transactions. His area drafts and structures the LCs, assisting with language, payment negotiation process, document discrepancies, and documentary collection. His area also works with the sales team in delivering the product functionality and capabilities that PNC clients need and require. Product and Trade Service Operations also works with PNC's systems group to manage the system's infrastructure and risk management development. Joseph Reilly (right), VP, Manager of Specialty Sales, Global Treasury Management, also works with PNC's Operations area for structured pricing and processing and providing feedback about the needs of the companies with which he meets. He also sets up and performs joint calls with relationship managers.

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