MUMBAI: As the war in West Asia disrupts shipping and pushes oil prices higher, Citibank’s corporate clients are largely holding off on tapping their credit lines.
The muted demand for liquidity contrasts sharply with the early days of the covid-19 pandemic, when companies rushed to draw down bank facilities to shore up cash buffers, Jason Rekate, the bank’s global chair of corporate banking, who was elevated to the role two months ago, said in an interview with Mint.
“In the early days of covid-19, those drawdowns were extraordinary, unprecedented. It is pretty minimal right now,” said Rekate. “As a percentage of our overall book of credit facilities, it has not been much at all and I would even describe it as less than I would have expected.”
Rekate said the restraint reflects stronger corporate balance sheets built after the pandemic, helping companies absorb shocks such as oil-price volatility and disruptions to without immediately turning to bank credit.
“They became comfortable with holding on to more liquidity for themselves, but also realized that banks were performing. I think that people have a lot of confidence, especially in large regulated banks and they do not necessarily need to draw those facilities to be sure that they are available,” said Rekate, who has spent around 24 years at the Wall Street bank.
The war in Iran, now in its third week, has created a shipping bottleneck in the Strait of Hormuz, a narrow conduit through which about one-fifth of global oil supply passes. Oil prices have remained volatile, touching $100 per barrel as economies scramble to contain the fallout for fuel prices, consumption and growth. In periods of stress, demand for working capital facilities typically rises as sellers charge more for the same amount of goods.
Analysts have also flagged risks from rising oil prices. In a report on the Indian financial sector on 12 March, analysts at Fitch group company CreditSights said timelines related to the length of the West Asia conflict are unclear and the longer the conflict continues, the greater the damage, given the Strait of Hormuz closure.
“The big picture stuff that everyone is paying attention to right now is if you have some sort of exposure to energy prices and you need to think through that. If you have unhedged energy price exposure, you are going to need to think through what that means,” said Rekate.
Corporate clients are seeking as much information as possible to manage the potential impact of the crisis, he said. As part of that effort, the bank is speaking with treasurers and chief financial officers both at headquarters and subsidiary levels.
“They are trying to inform their own management teams, their boards of directors. How are we operating? Are we doing a good job? Are we having some challenges?,” said Rekate.
Corporate activity remains resilient
Rekate’s elevation in January was part of a broader push by chief executive Jane Fraser to sharpen the bank’s competitiveness against Wall Street rivals, according to a Reuters report.
Rekate said Citi still expects corporate banking growth to continue, though predicting how the year will unfold has become more difficult amid mounting global uncertainties.
Fraser recently said that “despite everything, corporate activity’s very strong at the moment. Large-cap M&A is not missing a beat right now.” According to Fraser, risks could rise if the West Asia crisis drags on and converges with concerns around artificial intelligence (AI) valuations and the disruption risk into business models from AI.
Against that backdrop, Rekate said Indian companies are likely to continue pursuingas they expand beyond the domestic market.
India has seen a surge in outbound M&A deals recently, including Tata Motors’ agreement to buy commercial vehicle company Group for €3.8 billion and Lupin’s €190 million acquisition of VISUfarma.
“The access to capital is much better than it was 10-20 years ago. They have terrific human capital, human talent here that can participate in the most sophisticated types of transactions that we see around the world,” said Rekate.