Banking relationships

Published: Nov 2016

This issue’s question

“What if your bank’s strategy no longer includes you?”

Jan Bellens, Asia Pacific Banking & Capital Markets Leader and Global Emerging Markets Leader, EY

Jan Bellens

Asia Pacific Banking & Capital Markets Leader and Global Emerging Markets Leader

If your organisation was being served by one of the major European and US banks that have recently withdrawn from certain geographies, this may then call for a review of your banking providers for treasury and transaction banking services.

Tedious as that process may be, there is reassurance that even as (what were previously) international behemoths reassess and redefine their Asia operations, regional and local institutions are scrambling to fill the void left behind and reposition their corporate relationships. For instance, while UK institutions withdrew from South Korea, Asian counterparts including China Everbright Bank, State Bank of India and Bank Negara Indonesia made forays into the same market, focusing predominantly on corporate and trade finance.

Meanwhile, the inevitability of a more integrated and increasingly barrier-less region with the ASEAN economic integration has already witnessed the creation of pan-regional strategies by DBS, Maybank and CIMB (positioning themselves as pre-eminent Asia/Southeast Asia-based banks). Australian banks ANZ and Commonwealth Bank of Australia, as well as the Japanese megabanks have also expanded across the region. Many of these institutions actually have ambitious plans to eventually generate over half of revenues outside their domestic markets.

Unfortunately, although these banks typically have strong and localised corporate banking relationships, not all possess the size or holistic product and service suite to serve the complete requirements of large corporate customers with far reaching regional operations. What many Asian banks have done, rather than try to be all things to all corporate customers, is to focus on developing their strengths and expertise to deliver best-in-class services in niche areas.

Therefore, rather than consolidate engagements for economies of scale and scope, corporate treasurers might now have to extend relationships beyond their historical one or two primary corporate banks and appoint a broader pool of financial providers. Such a tiered-relationship hierarchy would see top banks that possess broader capabilities perform the majority of services, while smaller peers provide local support or specialised services in territories where the bigger institutions have either withdrawn operations or have never developed strong enough scale and reach.

The other challenge we foresee corporates facing arises from the competitive advantage enjoyed by global banks (vis-à-vis their Asian counterparts) in having standardised data for their risk management and reporting activities. These data infrastructures are already optimised (possibly partly forced, or driven by regulations such as Basel III, Sarbanes Oxley, Dodd Frank) and in turn yield higher data efficiencies which allow for more credibility in pricing, what-if analysis, and other predictive analytics capabilities that are increasingly crucial in transaction banking. And since not all treasury services at regional banks are up to par just yet, corporate treasurers reviewing their financial providers should be prepared to accept some inconsistencies in data quality and fit, services, and pricing across geographies and deal with temporary teething issues before the dust settles.

One of the additional outcomes of re-evaluating banking relationships is that corporate treasurers may now be more open to alternative service offerings from fintechs. While it will take time for these players to go mainstream, many corporates are increasingly open to alternative service providers, are willing to hear them and try them out, for instance within the increasingly competitive domain of foreign exchange.

While Asia corporate banking is going through a phase of transition, corporate treasurers should ultimately be beneficiaries. For every institution that is exiting, several others are keen to step in to fill the potential gaps.

Stephen Harper, Senior Treasury Consultant, PMC Treasury

Stephen Harper

Senior Treasury Consultant
PMC Treasury

It probably does not come as a surprise to anybody that the concept of the traditional bank is gone. The banking industry is being transformed as it struggles to find avenues for growth, regain trust and rise to the challenge of non-traditional players. Fiscal pressures and rising customer expectations are forcing the banks to make tough choices about which customers and markets to serve. As banks cut costs and adjust to an era of capital constraint, it is very possible that you are no longer a part of their plans. Not that I am suggesting that banks are neglecting their customers; but rather that you may be just one of their competing priorities!

Geographically, we are seeing shifts from global to local banking. National and regional institutions are now more visible where we might not have noticed them before. Banks in the EU have been retreating to their home markets since the crisis and we believe this trend will continue. The once perceived advantages of global banks, such as pricing and coverage, are now less important as regulatory constraints (matching lending with deposits) force the banks to compete on a local basis.

In product terms, where we once tended to give our ancillary business to those banks that extended their balance sheet, the divorce between relationship and credit will mean that selecting banking partners will be driven increasingly by product need and jurisdiction. Similarly, new industry players are emerging, an example being how insurance companies offer products to replicate bid and performance guarantees at a competitive price.

Competitive advantage is now influenced more by technology than a physical network, and customers are being forced to adapt. This also presents an opportunity if we accept that the new world reality features low cost banking providers, with every product having to be profitable on a stand-alone basis. Credit, best practice, innovation, service and product offering might all be found at different institutions. We need to be both more creative and more focused in our choice of partners within our bank group.

In summary, an increasingly constrained banking environment is forcing existing players to focus on the markets and/or the products that best serve their strengths. With fewer players, who exit from domiciles where they are subscale, you will need to look at the applicability of your bank group or syndicate as it relates to your country coverage. Knowing what you need, how to change from what you have and how to design your “go forward” strategy will all become part of a core skill set.

Bob Stark, VP of Strategy, Kyriba

Bob Stark

VP of Strategy

In corporate treasury, we have been conditioned to believe that our business is valuable to our banks. Traditionally, treasurers have had to say “no” to their banking partners more often than “yes” as corporate lenders tried to parlay their participation in a credit facility into more cash management and trading business.

The events of 2009 changed this landscape. The fallout of the credit crisis combined with the effects of Basel III has shifted the way banks evaluate where they do – and do not – want to do business. This can also read “and with whom” they want to do business because some customers may be more profitable than others for a financial institution.

While the massive pullout of RBS from cash management banking has thus far been unique, it would be optimistic to assume that others will not follow suit, in whole or in part. A treasurer, who is also a risk manager these days, must therefore plan for the possibility that their bank’s strategy no longer includes them. The most obvious scenario is within cash management.

For background, Basel III requires banks to hold liquid assets to offset corporate deposits. There are two categories of deposits (operating and non-operating cash), each with different collateral requirements as measured by the liquidity coverage ratio (LCR). This model assumes non-operating cash, those deposits that are not required for short term working capital, has a higher probability of leaving the bank in a runoff scenario and therefore the bank most hold more collateral to offset this possibility. In plain terms, this costs the bank more money to hold this type of deposit.

While there will be examples where banks no longer accept your non-operating cash, it is more likely that the bank’s strategy is to lower the rate of return offered. This would be in the form of earnings credits (where applicable) or a lower rate of interest, in some cases dipping into negative returns.

Fortunately, treasures can be proactive by focusing on these three initiatives:

  1. Understand your cash balances – separating into operating and non-operating cash is an absolute must.
  2. Know what is important to your bank – banks care about two time periods: 30 days (for the LCR) and one year (for the net stable funding ratio or NSFR). Corporates need to think of these timeframes when planning how to manage their cash.
  3. Perfect your cash forecast – the old excuse that I’m cash rich so I don’t need to forecast goes out the window, banks will charge to hold this excess cash.
  4. Consider other investments – perfecting your cash forecast will help identify other types of investments with higher yield that can be committed to, given that the improved forecast visibility allows more confident longer-term investing. Money market funds, tri-party repos, separately managed accounts all generally stay within existing investment policies. In addition, some treasurers will look at more creative options such as collaborating with accounts payable and procurement to take advantage of higher yielding supplier discounts.

Next question:

“Since AEC integration at the end of 2015, what have been the most significant developments across the ASEAN region and what opportunities or challenges have these developments created for corporate treasury departments?”

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