Treasury Today Country Profiles in association with Citi

How does your bank view you?

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Banks play an important role in the life of a corporate treasury, so wouldn’t it be good to hear how they view the relationship? Here’s what four leading bankers and a specialist treasury consultant have to say: from their take on multi-bank solutions to realising that corporates are no longer tethered to specific institutions.

Whether you see them as valuable commercial partners or as a necessary evil, financial institutions are a major part of just about every enterprise. Given the key role that banks play in the life of a corporate treasury operation, the relationship between banker and treasurer should almost certainly be more than just one of convenience. Indeed, for Kelvin Walton, Director of UK-based treasury consultancy, TreasuryWise, “Good relationships are increasingly mutual and based on good communication.”

But what constitutes a ‘good relationship’? There are formal means of measuring the relative performance of a treasury function and those of its banking partners. These benchmarking exercises can generate vital key performance indicators which may be used to steer the relationship in a desired direction. But if the dynamic between a corporate and its banks is to be more equitable and based on mutual understanding, it suddenly becomes a worthwhile exercise trying to understand how a bank views its clients. If it is possible to see what has changed and what has stayed the same since the onset of the financial crisis, this should give us a glimpse of how the landscape may shape up in the future.

Expectations: a dangerous game

Even if it is balance that lies at the heart of a successful bank/client relationship, there must always be an element of caveat emptor in any transaction and the regulators try to ensure that what is being sold by banks is transparent. “However, if the value and liquidity of a product is not plain, clients should walk away,” says Walton. In his experience, treasurers are increasingly prepared to challenge and even change their banking relationships on the back of genuine (as opposed to public perceptions of) breakdowns in that level of trust and service. This is a major indicator of the changing dynamics in the relationship.

The expectation that a bank’s services will deliver what is required – whether they are relationship or product-driven – is in part controlled by a greater corporate need to understand the day-to-day aspects of that relationship. From the Board down, senior executives within corporates want to know more (and more often) about their liquidity, cash, funding and risk situation. On the debt side, banks may claim to have the products, services and flexibility to meet most corporate needs, but treasurers are now stopping and considering if they are banking in a “rational and low-risk way”, says Walton. Such rationalisation, he notes, can lead to a diversification of depositing and investing counterparties, which in turn can “break the traditional pattern” of depositing with the bank a firm is borrowing from. “When a corporate is looking at its future funding, it has to be aware of how the availability of funding from its traditional banks might deteriorate,” he explains.

Corporate treasurers may raise the red flag more often than before, but, warns Walton, there has not been a complete transfer of power, and neither should there be. “If the treasurer isn’t thinking in the bankers’ way, they are liable to miss important points about their overall financial situation,” he says. Banks will always retain the expertise – because that is their professional raison d’être – so the need is for corporate thinking not only to understand the way a bank operates, but also, to some extent, anticipate it.

A two-way flow

The nature of the bank/client relationship may be in a state of flux right now but, paradoxically, successful relationships must, more than ever, exhibit a tighter fit based on mutual understanding, each playing to their respective strengths. One of the key areas of the treasurer’s role is managing risk. However, they may (and do) argue that “we’re not credit analysts, we’re treasurers.”

Walton questions the wisdom of such a remark in the current environment. Whether or not treasurers should be equipped with profound risk analysis skills is a moot point – that is the banks’ job, surely – but he feels all treasurers need to be able to trust their own judgement around forecasting and risk management. Certainly there are examples where individual treasurers have managed to shield their company’s finances from the worst effects of the crisis. Nevertheless, if there is a knowledge gap that needs bridging, much of the expertise must naturally reside with the banks.

So what do the banks think of all this? Barclays’ Head of International Cash Origination, Michael Mueller, perhaps somewhat predictably says that the “client is king” and that “trust and openness and a certain degree of professionalism” are necessary to prove to the client that the bank is a credible counterparty. “I think these fundamentals will always be there,” he adds.

But Mueller sees an additional element that has become more pronounced since the onset of the crisis. This is the need for banks to accept that they can now be viewed as the source of counterparty risk and that corporate clients will pursue this line of thought. “Banks need to understand how treasurers evaluate counterparty risk, what methodologies they use and, ultimately, what kind of limits the treasurers have for their banking providers, which in turn determines the size of the relationship.” It is a bold step in the direction of the mutuality that TreasuryWise’s Walton mentions above.

The nature of the bank/client relationship may be in a state of flux right now but, paradoxically, successful relationships must, more than ever, exhibit a tighter fit based on mutual understanding, each playing to their respective strengths.

The shift in the balance of the relationship is something also noted by Adnan Ghani, Global Head of Trade Finance Origination at RBS. Since the onset of the crisis, Ghani claims to have seen a strengthening of the relationship where both sides try to solve issues together. “If you have a one-sided relationship, in the medium to long term, that relationship cannot survive.”

Steve Dwyre, Global Head of Industrials Corporate and Institutional Banking at Lloyds Banking Group, acknowledges that corporates feel much less locked into relationship banking groups. Instead, they are far more open to having “that first conversation” with a new bank if its overall strategy (so not just its product set) indicates a closer fit with that of the corporate, especially if that bank can deliver greater understanding of the client’s core markets. “Since 2008, treasurers have been reviewing their banks and making sure the balance is there between the regions, their banks’ capabilities and between stronger and weaker banks.”

Prior to the crisis, there had been a move by some corporates to reduce the number of their banking relationships, to try to bring economies of scale. On the basis that banks can be a risk factor, there is a perceived need by treasurers to diversify risk. “There’s still a drive to reduce peripheral banking relationships,” says Barclays’ Mueller, “but there’s certainly a move away from selecting one global provider to working with four or five strong banks”.

This rings true with Andrew Daley, Head of Corporate Banking Europe at Standard Bank, who notes that the emphasis has shifted away from the abandonment of the many for the one. Now, those banks that cannot provide the best arrangement are dropped, in favour of a smaller panel bonded by closer ties than before. “We also see more of a collaborative effort and less of the confrontational bank-versus-corporate approach.” The aim now, he says, is to create relationships that are beneficial for both parties in the medium to long term. “There’s a lot more open dialogue being brought earlier into conversations, and sharing a lot more information both ways.”

Level pegging?

The consolidation of banking partnerships is not about bravado on the treasurer’s part, but certainly they have more will to strive for equality. Part of that strength is fed by the increasing availability of open or bank-agnostic technologies (SWIFTNet, for example) that, if not entirely delivering the nirvana of the fully portable account, at least mean they can move accounts more easily.

Technology vendors and bodies such as SWIFT and Bolero readily espouse the value of open systems that enable integration and migration between solutions. SWIFT’s eBAM (electronic bank account management) for example offers practical assistance to both corporate and bank by removing reams of paperwork and other administrative headaches.

In acknowledging that clients can more easily move their accounts, Daley takes it as a warning for the entire banking industry that it “has to earn the right work with the client” on a daily basis, rather than every few years when the RFP is issued. “The future is definitely leaning towards the banks’ positions being less secure with the companies they work with.

Mutual cost-effectiveness is desirable, but might unhitching the client from a proprietary technology lock-in make the banks a little nervous? And what of the potential to dis-intermediate the banks altogether in some aspects of debt; is that a worry for banks? For Ghani, “competition is a good thing. When banks are ‘on the edge’, it pushes the need to develop new products and solutions for clients,” he says.

Proprietary systems may be seen as a ‘loyalty’ device by some, but these systems, notes Ghani, “have a lot more functionality and benefits than some of the multi-bank solutions on offer”, whereas multi-bank systems have a degree more convenience for clients in terms of access and data management. He believes multi-bank solutions have not gained too much in the way of traction so far, in part because of the lack of standardisation of document-formatting in most banking sectors. “There is still a lot of work required” and, he adds, that corporates should get more involved in helping to set these standards. After all, notes Ghani, most of the banks’ activities are derived “from what the clients want”.

For larger corporates, differentiation by banks through technology is mostly dropping away, says Daley. He believes that the 2008 crisis accelerated the need for open solutions that don’t tie clients to particular banks. Today, the bank is seen less as a “technology bridge” and more as a strategic partner. A corporate, he observes, “will be looking to organise its thoughts around its risks and stakeholders to improve upon its own position, rather than focusing on the technology.”

In acknowledging that clients can more easily move their accounts, Daley takes it as a warning for the entire banking industry that it “has to earn the right to work with the client” on a daily basis, rather than every few years when the RFP is issued. “The future is definitely leaning towards the banks’ positions being less secure with the companies they work with.”

Mueller accepts the inevitability of landscape change. He too sees the bank/client relationship as being ‘more balanced’, with treasurers possessing ‘a higher degree of sophistication’ when it comes to placing liquidity. There is, he notes, “more awareness” of the potential risk of the relationship. In his discussions with treasurers it has become abundantly clear that corporates are far more aware when it comes to monitoring that risk too.

Your view of the banks

Prior to the collapse of Lehmans, the bank being seen as the source of counterparty risk was almost unthinkable, or at least way down the list from supplier risk. In this world, treasurers could rely on two main risk assessment measures: CDS spreads and public ratings from Moody’s, S&P and Fitch. Post-crisis, CFOs and treasurers need to understand their evolving counterparty exposures in so much more detail, says Dwyre.

There is therefore a need to ‘go beyond CDS and ratings’ and consider a more sophisticated framework of analysis: exposure to peripherals and the sovereign crisis is the current hot topic in terms of a bank’s exposure. But how about capital adequacy? What’s the tier one core capital ratio? What’s the buffer of primary capital available for loss? How much primary liquidity does the bank keep in central bank accounts or in easily touchable or permanently pledged, discountable assets? “Every bank publishes this information today so it’s not too difficult an exercise to pull up a certain set of ratios and exposure to sovereign peripheral debt before running that through a framework,” says Dwyre.

Whilst the day-to-day work of the corporate treasurer remains much the same as ever, Standard Bank’s Daley notes that “there are far more requests for, and interest in, strategic insight” from the bank. Banks must provide treasurers with an understanding of how the environment is evolving, what the trends are in the market, and even how the treasurer’s own bank would respond in certain situations.

Dwyre concurs: if a bank’s technology offering is no longer seen as the differentiator by corporates, it falls to the service element to demarcate. “Everybody is providing essentially a commoditised offering,” he notes. “But we live in an increasingly uncertain environment where the rule book has been ripped up and re-written over and over again since 2008.” Providing solutions to new problems is a key element of the service that corporates want. What is therefore needed to win and retain business, he says, is proactive advice and ideas-generation around a multitude of areas such as regulatory change, pricing and market appetite for a capital markets issue, and market movements on FX and rates.

The general agreement is that the remit of the treasurer has expanded, and that the importance of the role has risen accordingly. It follows that the requirements a treasurer has of his or her banks is also more extensive. For Daley, “this is a clear driver for the increased strategic dialogue.”

It also perhaps suggests that some banks had better up their game if they wish to retain the clients that are more aggressively pursuing equality and balance. “There is a requirement for banks to be more co-ordinated,” admits Mueller, acknowledging also that “there is certainly a requirement for banks to understand and look at corporate relationships more holistically.”

If trust and openness are part of the new deal, Dwyre insists that the arrangement should be a “two-way street”. Trust of a bank comes by its provision of good service. If this can be maintained, treasurers will be more open to talk to the banks about the issues they may be facing. Mueller believes that openness should involve an understanding of the opportunities and the limitations within that relationship. Banks must be open about their product limitations, but they also need to understand and respond to the limitations that a treasurer may face with respect to their particular risk profile, their limits, the products they have ‘and the journey they are on in terms of their own level of sophistication’. This can only happen through continued dialogue.

Turning the tables

But enough of the corporate’s eye view, what else are the bankers thinking?

Accepting that hard times are the driver, that service is everything and that technology is just an enabler, banks still see the personal aspect of the relationship with their clients as a major part of the deal. “It is a people business and you need to work hard at it,” Mueller observes. Understanding the client on a professional basis is vital, but he believes that having an understanding of the treasurer’s personal background can sometimes help, “if they are willing to share that.” Walton, in characteristic good humour, suggests that it might be difficult to remain on good terms though if one week banker and client are on the golf course and the next week the client’s loan facility is being withdrawn.

The serious point of this is that if the bank talks to the client on a daily basis and has a firm grasp of their business and the industry in which they operate, it need not reach this stage. Daley firmly believes that if a problem arises it is how those issues are resolved that “demonstrates the strength of a relationship.” It falls to client relationship managers to forge the level of understanding of the client – and the client’s own industry sector dynamics – to enable this to happen. A strong connection with the treasurer also enables the bank to build and offer the right products and services. The emphasis here for Ghani is on offering the right solutions. Treasurers do not wish to be bombarded with products “in the hope some will stick”, he says. “They want banks to get under their skin, understand their needs and proactively come up with solutions.”

Although treasurers have a much firmer grasp today of what it is they want from financial institutions, for Mueller, it is still “the responsibility of the bank to understand the client, not for the client to understand the complexities of the bank.” He believes that the more transparent a bank is with respect to the way it operates, the easier it is to deal with “difficult situations” and “add value to what the client does.”

In practical terms, banks need to accept that it is their role to respond to what the client needs, as opposed to the client having to adjust its systems and processes to what the bank wants. Having said that, Daley believes that the corporates coming to a relationship armed with a clear list of product and service-level requirements are the ones that build the most successful partnerships. “Disappointment usually happens when expectations are unfulfilled. To get the expectation piece clear from the start means people can focus on the delivery.”

By and large, says Ghani, treasurers do appreciate the difficulties banks face in offering modern services to an increasingly demanding sector. There is necessarily, however, a bit of give and take in the relationship. This is exemplified in the technology arena where it may sometimes be easier for the client to make adjustments to their processes rather than the bank adjusting its systems if, for example, straight through processing (STP) is sought. Of course, there is a dependency here on the extent of the bank/client relationship: as it moves towards the high end of the business – at multinational level – the more there is connectivity between the two sides, the more there should be transparency in the relationship so the client understands how the bank works and vice versa. Ghani accepts that the bank has a responsibility to keep all parties up to speed with any ‘challenges’ that may surface.

A learning curve

“When we’re setting up complex structures for clients (such as shared service centres or payment factory arrangements) we’re talking about multi-year projects to fully ramp it up,” notes Mueller. “Over this period you learn a lot on both sides, sharing a lot of knowledge.”

As a project progresses, there will inevitably be discussions around how each partner sees the industry developing; working on major projects of this nature necessitates a common vision, “otherwise you run the risk of developing something that may quickly be redundant.”

“Banks have a huge amount still to learn from clients,” says Daley. Direct feedback to the bank is a valuable commodity. Product development, for example, is often driven by client input, and many major banks have established client advisory boards to help steer internal development groups. But for a major bank, assuming it covers multiple industry sectors, it has the opportunity to learn how things are done in a variety of industries and to try to find common applicability across products and services.

Many requests from corporates are still driven by rather prosaic commercial imperatives such as finding cost reductions or improving efficiency. Banks will look at each and try to find patterns amongst these requests enabling them to shape their own product and service sets. But Ghani urges clients to keep their long-term targets in sight at all times. “Short-term tactical matters can crowd out the long-term objectives, but you still need to ensure those short-term steps are actually helping to achieve the long-term goals.”

Economic uncertainty has made the role of the treasurer more challenging and complex, particularly within MNCs. Regardless of the size of the company, banks know that they must be more proactive in raising awareness of and meeting the issues faced by their clients, offering solutions and alternatives for consideration.

Whilst ‘the customer is king’ remains the maxim by which banks say they operate, they also seem to understand the need to let clients keep the channels of communication open and to roll-up their sleeves and get a lot more involved with the running of their accounts. And that treasurers will move on if they don’t get satisfaction.