EXECUTIVE SUMMARY • Banks must help treasuries connect to the rest of their business to add value
• For emerging markets, banks must help reduce risk, and cut costs for corporates in Europe
• Banks are at risk of losing lending business to the capital markets
• New regulations to stabilize banks work against the political desire to increase lending
• If banks are to de-risk, they must become more selective about how they use their balance sheet with clients
• The GTS business is a cornerstone for accessing other bank business lines
• Corporates are focused on risk over yield; they’d rather put their money somewhere safe than chase points |
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Jack Large, chair How do you align treasury strategy with business strategy?
When I joined SABMiller five years ago, we had over 30 banks at the centre and 120 banks across the organization. We have been through a long exercise to align banks with operations by considering what we need: essentially, cash collection, banking operations, raising debt – including bonds and bank debt – interest-rate management and foreign exchange. Our banking requirements are extensive but we are relatively low risk, which puts us in a fortunate position. However, in the current environment, we are acutely aware of the requirement to balance debt with ancillary services and fees.
Corporate funding
Jack Large How are banks going to fund corporates over the next three to five years?
Banks have a big problem because since a majority of large corporates that are investment grade will exclusively use the capital markets to access funding, bank loan books will be skewed to lower-quality credit, as other types of lending will not be profitable for banks. The only way banks can reduce their cost of borrowing is to merge. That is the antithesis of what the authorities want: they want banks to become smaller so they aren’t too big to fail.
Another challenge is that banks’ lending models are materially based on the provision of subsidized, revolving credit facilities, which, in turn, entitle banks to ancillary business. But I could envisage a situation whereby ancillary business is generally inadequate to compensate for the subsidized cost of revolving credit facilities. Furthermore, I can’t see why corporates couldn’t obtain revolving credit facilities directly from investors? The banking model is facing some huge challenges.
Post-crisis ArcelorMittal, for example, was 80% bank funded and 20% market funded, but those statistics have been reversed. This shift will be replicated by most companies. There is another dimension regarding where corporates place excess cash because it will impact banks’ ability to lend.
Ancillary business
Jack Large What are the broader implications of Basle III for banks and their ability to deliver for corporates?
Giving banks flow business is an important part of the relationship. The likes of SABMiller and Vodafone are big enough that our flows are meaningful. The scale of ancillary business varies significantly: for example, our Indian tax case necessitated a court guarantee, which generated collateral provision and agency ancillary fees, which we won’t necessarily have predicted. Even if we wanted to allocate it – which we don’t – it would be impossible.
Jack Large What strategy makes most sense: to use ancillary business as a lever or lending as a lever?
I’m sure that even Neil’s meritocratic approach consists of approaching banks that provide funding.
Counterparty risk
Jack Large How do banks want to be perceived in terms of counterparty risk?
Jack Large Do you proactively make a case regarding your counterparty risk?
The accounting industry needs to change dramatically what it regards as cash and cash equivalent. If you have a deposit with a bank, say in Ireland or Greece, or a deposit with JPMorgan for £100 million, accounting says: ‘That is cash or cash equivalents of £100 million.’ If I have swap exposure of £100 million to a bank in Ireland or Greece and a swap exposure to JPMorgan of £100 million, the accounting profession says impair the Irish or Greek bank swap exposure to, say, £60 million and JPMorgan to £95 million. Why should accounting treat the two exposures (swap versus cash) as different? Is my cash with an Irish or Greek bank really as safe as with JPMorgan?
If you have Government bonds, even if you are invested for 10 years, you can repo them and get daily liquidity that should be a cash or cash-equivalent instrument. Cash, depending on which bank it sits with, should not necessarily count without impairment as a cash or cash-equivalent instrument.
We have our cash covered by International Swaps and Derivatives Association agreements; we also take collateral because we have a huge in-the-money portfolio and we have needed collateral support agreements with every one of our bank group – this is how seriously we take bank counterparty risk. If you have a deposit and it is not covered by Isda, what happens if you go to the bank and say: ‘Please can I have my money back, my two weeks are up?’ and they say: ‘No’? We had one default under an interest-rate derivative with Lehman Brothers when it fell over; we are going to get a superb recovery rate on that, but we are now three years into the process. The loss was negligible on a post-recovery basis but it takes three years to get your money back.
Eurozone crisis
Jack Large How are you managing the crisis in the eurozone?
That need for flexibility and information is not just limited to the eurozone. There is increasing demand in emerging markets for information about how to move liquidity out of specific countries should they experience rapid change.
In addition, this contingency bank arrangement – with an entire mirror set-up – used to be unheard of but today is becoming increasingly common.
Single Euro Payments Area
Jack Large What does the eurozone crisis mean for Sepa?
However, at the same time, Sepa remains challenging. The costs can be significant. For example, we have direct-debit information within a billing system in some countries, and in a SAP (systems application programme) system in some countries. The aggravation and cost of adjusting those direct-debit fields is different depending on which system it is in. There are also technical issues, such as corporates having to be responsible for direct-debit mandate archives, to consider. A two-year time-frame for implementation would be quite a challenge for us and that is why we have to get ahead of the game.
One major problem related to Sepa is that banks’ efforts to promote it have been underwhelming. There isn’t clarity or understanding. Sepa is potentially a big opportunity – if a bank was able to explain the opportunity, companies would flock to them.
Of course, the other issue regarding Sepa is that given the euro crisis, it does seems ironic to be setting a deadline for Sepa.
Jack Large Presumably, if you put collections into a centralized environment, you still gain benefits, even if things go wrong in the eurozone?
If you are not clearing with the local bank buy-in – we are told by our local cash managers – cooperation to sort out reconciliation issues, for example, is not necessarily as forthcoming as you might expect. There are these idiosyncrasies that you would never think of unless you were on the ground. The idea of centralizing collections is not straightforward. You also have countries, such as Portugal, that don’t do direct debits in a meaningful way. They are essentially cash societies and are not going to change quickly. So it is a business decision as well, because you can encourage your customers to migrate to direct debit by making their bills cheaper or you can make other forms of payment non-acceptable, but you cannot do it if you are going to lose customers.
“What is logical from a treasury position is not necessarily logical from a business position. The last thing you want to do in a treasury function is to be accused of damaging the business. My function is to enable the business to do whatever the business wants to do” Neil Garrod, Vodafone |
Corporate treasuries
Jack Large What are banks doing to support corporate treasuries?