Bank Interview: Yera Hagopian, HSBC

Published: Feb 2009

In this month’s Bank Interview we talk to Yera Hagopian about current trends in liquidity management. We discuss how treasurers should go about reviewing their liquidity management structures and explore the factors that should be taken into account during such a review.

Yera Hagopian

Senior Product Manager, Liquidity Services

Yera Hagopian read French and Italian at Brasenose College, Oxford before joining Barclays Bank’s Management Development Programme. She worked in Treasury and Relationship Management, including two years in the United States, prior to positions as European Sales Manager in Payments and Cash Management and International Product Director in Global Electronic Banking. In 1999 she joined HSBC as Global Product Manager for Liquidity Services.

In terms of liquidity management, what are your clients’ top concerns in 2009?

Well, their top concern is liquidity itself! We are seeing some very major and unprecedented shifts in terms of people’s priorities. It is very clear that accessibility and security are taking priority over yield, and that’s a dramatic change from a year ago. It’s not hard to understand – the cost and unpredictability of externally sourced liquidity is a major concern for our customers.

They are therefore focusing much more on using their own internal sources of liquidity to the fullest extent possible, and adopting a more ruthless approach to this than previously. In the past people might have dismissed savings that were operationally difficult to achieve, because they looked at the situation and thought, “Well maybe I’ll save ten basis points – is it worth it?” So they may have chosen to ignore that little pocket of cash because it wasn’t going to make much difference. Now the situation is different – it’s not just cost but availability that’s the issue, and these types of decisions therefore have to be re-evaluated.

What types of liquidity management structure are clients looking for at the moment?

I think different structures have always suited different types of businesses. A lot of this is driven by the regulatory environment in particular countries and particular industries.

When we talk about structure, the main question is whether we’re looking at notional pooling or cash concentration. But really that’s too black and white. In order to be totally efficient in a global context, you need to be pragmatic and use whatever is available and feasible from a regulatory perspective to feed into your overall structure. Most people end up with some sort of mix and match structure.

There are two aspects to liquidity management. One aspect is the cost reduction angle, but I would say that the balance of priorities is now much more in favour of the second aspect, which is reducing gearing and improving the balance sheet. That does mean that a level of actual physical consolidation will probably need to take place to enable corporates to be able to report account balances on a net basis. Otherwise they may be realising the benefit in interest terms, but in terms of gearing they may actually not get all the benefits.

Do most of your corporate clients have a liquidity management structure in place already?

It varies hugely. I would say that most of them have some sort of structure in place, but the question is at what level. There may be a structure in place at the domestic level, relatively little in place at the regional level and less again at the global level.

What can treasurers achieve by reviewing their existing liquidity management structures?

Firstly, liquidity structures should be reviewed regularly in any case. No business is static. The currency and market mix will be changing all the time.

People should aim to understand the benefits of the structure better. Any modelling that they might have done two years ago is not going to be valid any more. The cost of funding has changed radically, so the benefit of a liquidity structure is likely to be much greater now. If decisions were made about pursuing things or not pursuing things a couple of years ago for cost-benefit reasons, those equations are likely to have changed dramatically.

People are also looking very carefully at their cash flow. I was going to say they are aiming to avoid surprises, but actually that’s unrealistic because most businesses are trading in very volatile conditions at the moment. Cash flows aren’t that predictable, certainly not in the long-term. Rather than trying to predict the flow, people need to be prepared to deal with the surprises and have contingency plans in place. It’s a question of identifying a problem as early as possible. There is a lot to be said for having some early warning that an expected surplus is no longer going to appear and that the company’s borrowing requirement is going to jump as a result. You don’t want surprises like that.

It is also worth reviewing the processes that are in place and determining whether they are still fit for purpose. There was a lot of focus on automating everything a while ago in the name of cost reduction. Cost reduction is still important, but the truth is that accuracy and control may be more important. In an environment where banks themselves are watching Risk Weighted Assets far more closely than before, unauthorised overdrafts may attract hefty penalties. And that may mean it is not possible to automate everything, or at least if you automate everything you’re still going to have to keep a level of supervision over it. While this may result in an increased headcount cost, the benefit of increased control and fewer errors may be worth the extra cost.

How should treasurers go about reviewing their existing structures? Where should they start?

People have to start at quite a macro level. The numbers are always a good place to start. First of all you need to distinguish between the available cash and unavailable cash – for example, cash that cannot be utilised for regulatory purposes. The unavailable cash needs to be taken out of the equation and other, possibly local or ring-fenced, solutions found.

Once you have identified the available cash, you need to figure out how much is currently being left on the table. Then you should be asking, if it is available then why is it not being used? Is it because there is some inefficiency in the process? Is there no process in place? Has the business changed? Is it taking too long to bring new markets or companies into the structure? Have you gone into new markets? Have the markets themselves changed?

How can the efficiency of the existing structure be measured?

When you are looking at the available cash flow and evaluating what sources of internal funding are available to the company, a measure would be what proportion of this is being utilised. And for a more absolute measure, you can look at what proportion of your liquidity needs is being met internally versus externally. If you’re trying to build a business case, that’s pretty compelling. It’s tricky though, because there could be good reasons why that balance might change as a result of market conditions – for example, if customers of one business line are delaying payments and this cannot be controlled – so targets need to be reviewed regularly. People can also look to benchmark with similar companies.

It is worth noting that the opportunity cost of getting it wrong or of having idle balances is actually growing. On the one hand there is a credit crunch on; on the other, interest rates are declining. Previously, if you got it wrong and left a few hundred thousand in an account somewhere, it was likely that you would still get some credit interest on it and the difference between that and the borrowing costs you incurred somewhere else probably wouldn’t be that great. Now, with interest rates as low as they are in major currencies and rocketing borrowing costs, the difference is likely to be much greater.

What other factors should be considered?

If you want your liquidity management to improve then having a more streamlined accounts structure is definitely a major factor. SEPA has brought some opportunities to achieve that, although not everyone has gone through that process yet.

The other thing that people need to consider is what happens at the local account level. So often treasury looks at what happens at the centre but sometimes things may be overlooked as a result. If the process isn’t working and the management of the balance of the local account is a little unpredictable, you may end up incurring overdraft charges on the local accounts. Those costs may actually eliminate the benefit of the liquidity structure.

Another factor that may need to be looked at is internal transfer pricing practices. Transactions that were priced at arm’s length previously may no longer pass the test. The benefit which is passed to a lending entity within a pool should reflect market reality. Apart from other considerations, such as tax impacts, a fair return is the best way to motivate full participation.

Of course, any revised business case has to be honest and capture increased costs as well as benefits. It is also worth considering that local bank relationships may have been priced on the assumption that there was going to be some sort of float. However, that float may disappear once an efficient liquidity structure is put in place, which may lead to some sort of local repricing. You may not know that immediately; it’s something that happens over a period of time. When you do a review, it is a good time to ascertain whether there have been any other impacts.

What about the reversal we are seeing in the trend to consolidate bank relationships – does this have an impact?

It can complicate things. With credit not as readily available that does put pressure on companies to maintain a larger number of bank relationships, which then raises the operational risk and financial cost of running a liquidity structure. While that does make it more difficult to build an efficient process, within that there are probably still opportunities for consolidation and rationalisation.

How are corporates changing their liquidity structures as a result of this type of review?

I think they’re becoming more open-minded about solutions. They are looking into new markets, markets they hadn’t necessarily considered before. For example, we’ve been working with WPP on their Turkish lira pool, which was established as part of their local business review.

We’ve enjoyed a long standing transaction banking and liquidity management relationship with them and we were helping them to consolidate their in-country transactional banking. As part of that there was also a review of their liquidity management, which led to the establishment of the Turkish lira pool in London. WPP can now consolidate and maximise the returns on the residual balances at the treasury level. It’s not necessarily a market that people would have looked at previously for the purposes of a liquidity management structure.

Do you think there’s a growing focus on adopting a global or regional approach?

Yes – but I do think that the global level is the wrong place to start. Liquidity management has to start at the local level. It has to be a bottom-up process because if the local level is not properly organised this will be evident at the top level. I think a country by country approach needs to be taken and local practices and arrangements rationalised, particularly in terms of account structure and internal co-ordination.

The approach taken will depend on the nature of the individual business. If a business requires a very extensive network of banks, for example because it has retail customers in a large country and it needs to be able to get cash and cheques into those accounts, then that drives a certain type of account structure. Payments can still be consolidated somewhere but it does mean that there will be a separate structure for the collections side of the business. Local business requirements and their impact on liquidity management have to be understood before you can start superimposing too many additional structures.

How is HSBC adapting to the evolving market?

We are continuing to invest heavily in this product area because it’s becoming more important to our customers. We are ensuring that anything we develop now is particularly flexible and that it is developed on a global platform.

To explain what I mean by flexible – for example, looking at notional pooling, the definition of notional pooling differs from market to market because set-off is not necessarily a recognised concept in some markets. Any product that you develop therefore has to be able to deal with all sorts of different permutations and interpretations. With the products that we’re developing now, we are able to price based on full set-off or not, depending on what’s achievable at a global, regional or local level.

And I think you said earlier that most people will end up adopting some sort of hybrid structure.

Yes, because they look at it country by country and they’ll do whatever they need to do to best realise their liquidity. And that will be different in different markets.

How do you see liquidity management developing in the future?

I think it all depends on what happens in the evolving market. We are seeing a lot more interest in cross-currency solutions. Part of that is due to the fact that the FX markets are very volatile as well. The spreads on FX swaps have been very wide and any cash management structure that exposes a customer to that sort of volatility is not really desirable. Some providers of cross-currency solutions can help to mitigate this type of daily exposure, so that is driving greater interest.

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