How to get more from your banks

Published: Nov 2015
Flamingoes on lake Naivasha

As the regulatory environment continues to evolve, it has never been more important for corporate treasurers to maintain strong relationships with their core banks. As it is with any type of relationship, however, stability and longevity are largely determined by the abilities of both parties to understand each other’s needs. Here, treasurers, bankers and industry consultants offer their views on how this can be best achieved.

Despite the altering nature of institutional relationships in the new, emerging regulatory and market environment, banks are still mainly seen by their corporate clients to be doing a good job, according to the 2015 AFP Transaction Banking Survey. A clear majority of the 784 global business executives that responded (68%) said that they are highly satisfied with the services offered by their main banking partners, a slight decline from the 70% who responded that way in last year’s survey.

That still leaves us, of course, with a significant number (32%) of financial executives who are less than highly satisfied with their banking relationships, a figure which, when evaluated against the results from the previous year’s survey, is gently increasing. This should not be too surprising to anyone who has followed banking issues these last few years. Banks have taken some serious reputational blows over recent years – state bailouts, the various benchmark manipulation exposés and sinking credit ratings, to name but a few. Add to that regulatory constraints forcing banks to revaluate their financing and deposit-taking activities, and perhaps the real wonder is why corporate satisfaction has held up so well.

In this article, we explore in detail just how these and other issues have been driving changes in bank relationships before offering some tips that will help treasurers – even those who say they are highly satisfied – to get more out of their banking relationships in the future.

Safety in numbers

There is something almost paradoxical about the relationship expectations corporates have of their banking partners today. Carole Berndt, Head, Global Transaction Banking at ANZ explains it well. “Corporates are not looking for proprietary systems and connectivity: they prefer bank agnostic solutions and mobility across their banking partners,” she says, adding that this is a strategy that has been made increasingly possible through technological developments in recent years. That is not all, however. “They want mobility, but they also want deeper relationships that bring value.”

Part of the push towards greater diversification of banking relationships stems from what the credit crisis revealed about the fragility of once seemingly stable banking institutions, but has been reinforced more recently by the decisions of some well-known banks to reconsider the scope of their regional footprints. By way of an example, a treasurer whose core relationship bank recently pulled out of European markets to focus on their domestic business recently told Treasury Today why, when the business was once again put out to tender, the decision was made to select two banks to cover a region once catered for by one. Her position is not difficult to understand. “The very last thing I want is to be left in the lurch again,” she explained. For almost time immemorial the ‘holy grail’ banking structure all corporates were working toward was to have a single global transaction bank or, at the very least, a single bank for an entire region. As the above comment reveals though, that paradigm has now been all but turned on its head.

Keeping everyone happy

“Historically, corporates that could have one bank across the globe or across regions would be very happy, because it offers economies of scale, and good service from one trusted provider,” says Nick Diamond, Head of Global Corporates, Transaction Banking, Europe, Standard Chartered. However, what we are beginning to see now, is that in order to manage concentration risk and get best in class solution and service, some of the more forward looking companies are beginning to look to meet their transaction banking needs from a currency by currency basis rather than geographical.”

The challenge for treasurers is how to foster those ‘deeper relationships’ ANZ’s Berndt speaks of whilst simultaneously implementing a regional or even currency banking model, perhaps with several banks selected for contingency purposes. Ultimately, corporates and banks want the same thing: stable, long-term relationships that bring value (which today, Berndt says, is all about providing aggregating data, insights into markets and, naturally, a partner that is going to support them in the good as well as the bad times). But if the corporate doesn’t think about what it can offer the bank in return, however, it may not obtain all or indeed any of these things. “It is not about the size of the client and their industry,” adds Berndt. “It is about do they need what we have and do well, and can we deliver it to them in a way that brings value to them, but also brings returns to our shareholders. It has to be a balanced equation.”

“Corporates need to consider how to best engage their transaction banks to ensure a mutually beneficial relationship” says Standard Chartered’s Diamond. “It is not especially attractive to only to be a contingency bank.” It is a task compounded by the regulatory pressures now baring down on banks. “The regulatory environment around the cost of capital and capital efficiency and management will mean that capital will become ever scarcer and the banks will require the appropriate return levels on capital commitment,” Vanessa Manning, Head of Product Management, Transaction Banking, Europe, Standard Chartered contends. “Operational balances are becoming increasingly important from a banks perspective only arising when you have the transactional business underneath giving rise to them. The core operating liquidity those activities provide is exactly what the regulators want to see.”

Given the difficulties associated with satisfying a large number of banks, all demanding a piece of that same transactional business, and the imperative to balance such demands with the management of concentration risk, how do corporate treasurers decide what the right number of banking relationships is? What is the optimal balance? The answer will, of course, vary considerably between companies and will be influenced by multiple factors including the type of organisation, its footprint and even its culture.

Some things are universal though. “It’s really dependent on our needs for credit, and how many banks are involved in that,” Matthew Venardi, Corporate Treasury Manager, Treasury Systems and Operations at Toyota Financial Services told delegates during a panel session at EuroFinance’s recent International Cash and Treasury Management conference in Copenhagen. “We have a scorecard that shows how much we feel we have paid in return for the credit that has been provided for us, and we try to make sure that we are compensating all our banks – there is always give and take.”

Once the corporates’ credit needs have been met, then the treasurer must ensure that the banks providing it are, like Diamond reasons, being adequately rewarded for their efforts (a negotiation which Venardi says is not always easy given that the banks in any given syndicate are typically after the same things from their corporate client). Here, sometimes, it might help to consider what other financial services the company is using that could be provided by a bank. “We absolutely have to understand banks’ needs and compensate them for that,” says Venardi. “To ensure there is no leakage out of treasury, if there are services that banks provide and we are doing them with non-banks, we should try to convert those.”

It’s good to talk

Both treasurers and bankers agree that, as the nature of their relationships with one another continues to evolve, it is important for both parties to make a conscientious effort to understand each other’s strategies and priorities – and, of course, where the mutual benefits reside.

“I think it is really critical for us to work closely together and try to understand what the mutual benefit is,” Jennifer Boussuge, Bank of America Merrill Lynch’s (BofA Merrill) Head of Global Transaction Services for Europe, the Middle East and Africa, told EuroFinance delegates. “From a bank perspective, if corporates can be more transparent around what their strategies are and how they allocate business, they will get more in return.”

Agreeing with Boussuge on the importance of an open, transparent dialogue, Jean-Michel Harlepin, Treasurer for Vinci Finance International, told EuroFinance delegates that he feels communication is even more vital in the post-Basel III world. “We expect a long-term relationship – we don’t want to be changing frequently – so transparency and communication is really important,” he told delegates.

That cuts both ways, however, and especially on the matter of regulatory impacts, he believes this could be improved on the bank side. “And that is something we lack recently with some of the banks. We understand the difficulty of the regulations being imposed on the banks. But we would like to have a better understanding of how this impacts the strategy of the banks we deal with, so a mutually favourable solution can be found.”

Banks are working increasingly hard on establishing more transparent lines of communication with clients though, especially on the matter of how services and solutions are priced. “We see increased demand for transparency around banks fees being charged,” says Standard Chartered’s Manning. “The key is in simplifying the way fees are communicated, to make ease of comparison between the banks for the services they provide.”

Armed with the facts

If the secret to getting more from one’s relationship banks is really all about effective communication, as Boussuge contends, then what can treasurers like Harlepin do to enhance that dialogue and help banks to better understand their strategies and where they can add value? Daniel Blumen, Consulting Partner at the Treasury Alliance Group, shared a few ideas on this. Blumen recommends a four-part process which includes the drafting of an impact assessment and a counterparty review, performing a Risk Adjusted Return on Capital (RAROC) analysis and devising a banking continuity plan.

Through the impact, assessment should help treasurers get a full picture of their company’s banking footprint and the services which are required, within which special attention should be given to obtaining full visibility over liquidity (without this it can be difficult to accurately ascertain which banks are critical to the business and which are not).

But Blumen adds that checking the validity of the credit rating assigned to the company is also a worthwhile endeavour to include in the process, considering that this is one of the principle things banks use to evaluate their corporate clients. “Believe it or not, people do make errors,” he says. “It is not a bad thing to go back to a ratings agency and tell them you think the assigned rating is incorrect and that you would like it to be re-evaluated.”

The next step is to carry out a counterparty review. Here the treasurer should be looking to document each banking relationship and the level of the company’s exposure. Critically, though this should be reviewed and updated on a regular basis, not filed in a draw somewhere and subsequently forgotten. “I hate the cliché ‘living document’ but it really should be something that is maintained in a dynamic fashion,” says Blumen.

The third step, the RAROC analysis, is more data driven and objective. “It has been around for some time,” he says. “I can promise you that is the way banks look at corporates, and what we are suggesting is that if that’s the way banks are going to look at you then that is the way that you should be looking at your banks.” Essentially, the formula for RAROC (risk adjusted return divided by the risk adjusted capital needed to generate that return) allows corporates to assess the value of their business to their banks. Often what value the corporate comes up with using RAROC will differ considerably from what the bank has calculated. But this is not a bad thing. It means that the treasurer, now armed with all the facts, is able to start a discussion with the bank. “It gives you a way of aligning your business with the people who are helping you,” says Blumen. “You want to make sure that the banks who are devoting risk weighted assets to you are getting the return they deserve.”

It is really critical for us to work closely together and try to understand what the mutual benefit is. If corporates can be more transparent around what their strategies are and how they allocate business, they will get more in return.

Jennifer Boussuge, Head of Global Transaction Services for Europe, the Middle East and Africa, Bank of America Merrill Lynch

Finally devising a workable banking continuity plan is of absolutely critical importance. “You want to take a look at your banking activities in terms of the services that you have, the services that you must have, the services that are good to have, and the services that are not entirely critical,” he says. “Then you work out where you can go next should a certain banking partner say they no longer want your business, ensuring that you are prepared for that scenario.”

Better together

The things which corporates and banks respectively look to get out of their relationships with one another remain, in many respects, what they have always been. Banks want relationships with their corporate clients to be profitable; in other words a reasonable share of the corporates wallet on things such as derivatives transactions and debt capital market activities. Corporates, meanwhile, want long-term reliability, expertise, technological sophistication and, naturally, competitive prices.

What has changed though – and what is likely to continue to change in the coming years – is the context in which relationships are forged. The new demands presented by the emerging regulatory and risk environments are undoubtedly making it more difficult for the wants and needs of both parties to be satisfied.

It should not be impossible, though, to find ways of ensuring corporate-bank relationships continue to be mutually beneficial. It would seem from the perspectives offered above that, to this end, both bankers and treasurers agree that communication is critical. With the list of treasury responsibilities growing longer by the day, meeting personally with that growing list of banking counterparties might not seem that appealing to the treasurer. Neglecting to do so, though, might be very costly from a relationship perspective.

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