The ICC Commercial Register confirms that credit risk in trade, supply chain and export finance is falling back to pre-pandemic levels.
The International Chamber of Commerce (ICC) – together with its partners Global Credit Data (GCD) and Boston Consulting Group (BCG) – has released its 2022 Commerce Registry Report, confirming that credit risk in commerce, the supply chain Supply and export finance has declined back to pre-pandemic levels for 24 trade and export finance banks, representing 9% of global trade flows.
Following the impact of the COVID-19 pandemic in 2020 on trade volumes, 2021 reaffirmed the resilience of global trade with a strong and better-than-expected return to growth, with total trade flows exceeding nearly 20 % pre-pandemic levels.
Although the commercial register is not necessarily representative of the conditions faced by small banks, the results of the report remain promising.
Trade flows and growth rates
This recovery in global trade, as well as its steady growth over the past three decades, has been clearly supported by trade finance products that provide liquidity and risk mitigation solutions for importers and exporters, allowing them to conduct cross-border transactions with confidence.
Despite the current macroeconomic uncertainty, BCG expects global trade in goods to continue to grow at an additional compound annual growth rate (CAGR) of 5.6% over the next 10 years on a nominal basis and 2.3% in real terms (Figure 1).
LGD on LC, warranty and SCF products
The ICC Trade Register continues to be the authoritative global source for default rates in trade, supply chain and export finance using its dataset which represents almost a quarter of all global trade finance transactions.
For 2021, the report confirms lower default rates across all asset classes compared to the prior year (Figure 2):
- Letters of credit (LC) on imports: the debtor-weighted default rate fell from 0.64% in 2020 to 0.29% in 2021 (-0.35 ppt.)
- Export LC: debtor-weighted default rate fell from 0.06% in 2020 to 0.05% in 2021 (-0.01 ppt.)
- Import/export loans: debtor-weighted default rate fell from 0.92% in 2020 to 0.36% in 2021 (-0.56 ppt.)
- Performance bonds: the debtor-weighted default rate fell from 0.49% in 2020 to 0.26% in 2021 (-0.23 ppt.)
- Supply Chain Finance: Obligor-weighted default rate fell from 0.93% in 2020 to 0.06% in 2021 (-0.87 ppt.)
- Export financing: debtor-weighted default rate fell from 1.01% for 2007-20 to 0.97% for 2007-21 (-0.04 ppt.)
While a decline in default rates relative to 2020 would be expected, it is even more reassuring that in many cases 2021 default rates are below pre-pandemic averages; this is likely due to a rapid economic recovery following the deployment of effective COVID-19 vaccines combined with continued government stimuli in many markets.
ICC Secretary General John WH Denton AO said: “These findings reinforce the findings of previous versions of the Trade Register: trade finance products continue to be resilient and represent banks with low levels of credit risk, even in times of macroeconomic uncertainty.
“It’s important that banks, investors and regulators recognize this and show continued support for this valuable asset class.”
As part of ICC’s continued ambition to enhance the value that the Commerce Registry brings to its member banks and the trade finance community, in this year’s iteration, the Commerce Registry is introducing a set improved data base for the calculation of loss given default (LGD), enabling better estimates of these values and, for the first time, LGD and expected loss estimates for supply chain finance.
Supply chain finance on the rise… and so is LGD
For the first time, ICC’s commercial register was able to report on the loss-given-default rate for debt financing. Representing around 16% of global supply chain finance exposures, LGDs fell from 0.09% to 0.13% in 2020 compared to 2021, “potentially due to the failure of a company with a high-volume, low-value SCF program”.
ICC has introduced a new business model for the Commercial Registry, for fee-paying member banks in 2021, which continues this year. The value proposition is intended for member banks, so it is important to note that it is not representative of the entire commercial banking ecosystem.
As this report only covers 21 banks, it does not illustrate or reflect 91% of global trade flow data from other banks, which did not share their data.
Despite the narrow scope of this project, the commercial register indicates a positive step towards post-pandemic trade recovery and risk appetite in the current macroeconomic and geopolitical environment.