Cash & Liquidity Management

In-house banks

Published: Jul 2014

Stephen Hogan, Vice President, Regional Treasury, Asia Pacific, Deutsche Post DHL:

At Deutsche Post DHL we operate a global in-house bank based in Germany and its solutions have been deployed across Asia Pacific. This has offered many benefits, both financial and non-financial, to our operations in the region, especially in free-market countries such as Singapore, Hong Kong and Japan, where we have been able to deploy the full range of services the in-house bank can offer.

A key benefit of the in-house bank is that it complements our zero-balance cash pooling in the region’s free market economies. The increased visibility which it offers allows us to effectively complete a two-way sweeping process on a daily basis from the subsidiaries to the in-house bank. We are then able to record the balances against the subsidiaries and pinpoint where these have come from, giving the group increased transparency.

The in-house bank also provides solutions for intercompany settlements which offers numerous benefits, such as removing the requirement of third-party banks when conducting intercompany payments. This creates cost savings for the subsidiaries as they no longer have to pay banks’ transaction fees. Also, exchange rate risk is removed from any intercompany cross-border transactions as these are carried out within the in-house bank at a pre-determined exchange rate.

As well as cost savings, the in-house bank also helps streamline the intercompany payment process. Historically, we would have a large amount of intercompany payments and in some cases there were delays between payments. However, since the introduction of the in-house bank we have consolidated these and now run payments on a monthly cycle. In doing so we have alleviated the worry for subsidiaries, regarding any outstanding receivables or collection of payments from sister companies. The subsidiaries are therefore able to use their time more effectively and focus on collecting from their external customers.

The in-house bank also assists in limiting FX risk by centralising the group’s currencies and offering the subsidiaries the ability to hedge any FX exposure from local third parties. In doing so the FX risk is passed on to the group at the central level through the in-house bank, thus protecting the local subsidiary.

Despite all the benefits there are a number of challenges which have to be overcome when implementing an in-house bank across the region. Key to this are the regulatory challenges posed in many countries, meaning that often the full range of solutions cannot be deployed. For example, in some countries we may be able to run the intercompany settlement process but will be unable to deploy the cash pooling process.

It is therefore imperative that the treasury recognises the local regulations in each country and appreciates that the region cannot be approached with a one-size-fits-all policy. A key requirement when implementing the in-house bank is to have flexibility and to have a detailed understanding of the nuances of each country. To obtain this information treasury should work with its tax advisors, legal advisors and banking partners to ensure that it has the correct local information to implement the in-house bank successfully.

Finally, the challenges posed when implementing an in-house bank in the region means that it is important that the whole group is committed to the project. This is particularly important at local level, where the project cannot be pushed through like a directive. The teams on the ground will need to understand the benefits they will obtain as they will be vital in providing feedback on local practices and regulations which will further assist in its implementation.

Martijn Stoker, Head of Liquidity and Escrow Product, Asia Pacific, J.P. Morgan:

Reducing your company’s bank borrowing, reducing your cost of FX transactions, cutting interest payments on your debt and improving the yield on your investments: which treasurer wouldn’t be interested? Centralising your treasury into an in-house bank can achieve all of this – and more – but it is not a quick fix.

An in-house bank can be best described as a centralised treasury organisation performing activities for subsidiaries that were traditionally performed by multiple banks. And, as with any fragmented and de-centralised operational process or platform, challenges are presented in the form of an inefficient business, stubbornly high costs and a lack of insight and visibility into a company’s overall financial position.

To meet these challenges, treasurers and CFOs are increasingly establishing in-house banks with a view to:

  • Bundling expertise in a single location to become a centre of excellence.
  • Optimising liquidity via intercompany lending arrangements, netting and centralised payment/collections, thus reducing bank facilities and funds trapped in the clearing cycle.
  • Improving pricing performance due to increased scale and volume, creating negotiating power for banking fees, FX dealing and rates products.
  • Optimising the utilisation of a sophisticated treasury management system.
  • Achieving cost efficiencies by creating pooled resources in treasury, finance and IT.

In essence, the basis of an in-house bank is to operate the in-house bank accounts, over which all funding, investment and hedging activities flow. Centralising these activities into a centre of excellence will enhance your control, visibility and risk management practices significantly.

Our clients in Asia Pacific who have centralised their investment management have seen an improvement to their overall yield and indicated that this has enhanced their counterparty risk profile significantly. The specialised team that oversees the in-house bank will be better positioned to determine the investment risks and can decide on the optimal allocation. Other activities that benefit from setting up an in-house bank are the FX dealings, whereby increased volume and improved expertise will result in more efficient hedges and improved pricing, thus optimising the firm’s risk-return equation.

The benefit of an in-house bank operation is usually re-allocated proportionately across the subsidiary structure by sharing both the costs and the benefits from the improved yield, quality of cash and risk management operations.

The key for a successful in-house bank structure anywhere in the world is to get it right from the start. A trivial decision on the in-house bank entity’s country of incorporation could have a negative knock-on effect further down the road.

Also, taking the control away from the subsidiaries can change attitudes and skills. When local management is less concerned about cash flows than at parent level you could end up with an issue. This is similarly true for changes in local regulations, especially in Asia Pacific. When the in-house bank is completely separated from local markets and industry developments, new opportunities might be missed, so one of the most important objectives when establishing an in-house bank is setting a clear and transparent operational structure that combines good regional governance with an appropriate level of in-country expertise

Setting up an in-house bank in Asia Pacific will still deliver all the above benefits. This, however, requires the full support from the top of the organisation and a dedicated and experienced in-house bank project team supported by the right partners.

Mohit Mehrotra, Executive Director, Deloitte Consulting:

As the roles and responsibilities of treasury have expanded, treasury groups in Asia Pacific have been focusing on gaining greater visibility into a company’s funding needs, better deployment of internal liquidity sources and optimising working capital. Creating an in-house bank structure can be part of a strategy an organisation adopts to meet these demands.

Having an in-house bank allows an organisation to efficiently manage intercompany transactions between internal divisions and subsidiaries via internal virtual accounts. These accounts are used to automatically clear both internal and external cash flows. An in-house bank also enables the organisation to capture and centralise intercompany transactions, thereby reducing its foreign exchange transactions and resulting external banking costs. Another benefit of an in-house bank is that it increases visibility and control over functions such as cash concentration, cash positioning and cash flow forecasting, all of which may contribute to better liquidity management and improved decision-making around investments and funding requirements.

The typical goals for setting up an in-house bank include reducing financial transaction costs, reducing the cash collection time, increasing visibility to global cash positions, improving foreign exchange risk management practices and standardising bank communications.

As best practice, an in-house bank should have a centralised internal banking structure that can offer opportunities to rationalise bank accounts as well as relationships with banking partners across the organisation. Associated bank account administration activities can be consolidated and managed by one central group that can be located in the most cost efficient centres.

In-house banks should also implement efficient cash concentration structures. Cash pooling can be complex in Asia Pacific, due to jurisdictional, tax and legal restrictions. Therefore when establishing efficient pooling structures, various areas of the organisation should be consulted owing to interdependencies including tax, legal, accounting, account administration, accounts payable, accounts receivable and technology.

The next question:

“What benefits would greater ASEAN integration bring to corporates operating there – and to the broader region? Also, what progress is being made towards the establishment of a pan-ASEAN clearing and settlements system?”

Please send your comments and responses to qa@treasurytoday.com

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