Ask any investment banker to draw up a list of those companies of the world they would most like to bank, and US-based global industrial conglomerate General Electric would almost certainly be at the top of that wish list.
GE and its finance arm GE Capital are not just large components of the biggest and most lucrative investment banking fee-paying market, with operations in all of the main developed and fast-growing economies of the world, the company is one of the largest corporate clients an investment bank could have globally.
In debt capital markets in particular, where GE Capital is the US’s largest corporate issuer of long-term debt and the world’s largest issuer of commercial paper, investment banks fought tooth and nail to win lucrative bond mandates.
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| Kathy Cassidy, treasurer of GE and GE Capital |
That desire to win, however, has now had to be refocused elsewhere as GE Capital pares back its once massive annual issuance needs, forcing banks to try to offset that sharp fall in fee earnings in other less racier areas of banking. And the area where banks are now fighting tooth and nail? Transaction banking.
“There was a point in time not so many years ago when we were issuing $70 billion to $80 billion dollars a year in long-term unsecured debt and the banks would all focus their attention on being part of that pie because they knew that they could earn fees,” Kathy Cassidy, senior vice-president and treasurer of GE and GE Capital, tells Euromoney.
“As issuance patterns have changed – in 2013 we issued $32 billion dollars of long-term unsecured debt, and in 2014 we will issue a smaller amount in the $25 billion dollar range – so banks have had to focus more on where and how they can secure other types of sustainable revenue-generating fee opportunities.”
Transaction banking has become one of the main businesses for banks to focus on purely because it offers sustainable and high-quality revenues and profits at a time when investment banking revenues on the whole continue to slip and slide.
In addition, the value of this business can multiply if, as a result of the transaction banking relationship, the bank can generate other lucrative ancillary banking business from it, such as foreign exchange, rate or commodity hedging.
Another bonus for a bank is that transaction banking is notoriously sticky.
“Banks have really focused in on this as a great way to lock in stable cash-flows that are hard to displace,” says Cassidy. “Once you have a banking relationship, it is a real effort to change. They realize that and are putting higher-quality people into this business and developing capabilities that are attractive.”
While this is a welcome development, and particularly as the role and responsibilities of a corporate treasurer have expanded substantially since the financial crisis and therefore requires so much more support from the banks, Cassidy says GE assesses its global banking relationships across businesses.
And she warns: “For every bank, we know what their strengths are and what their weaknesses are too. We also know how much credit they supply to us, which is still a very important factor.
“It’s really a holistic understanding of what the banks are good at, how much credit they provide to us and then what fees they earn from us. We think of the cash management business as one way we can compensate them for the overall relationship they have with GE.”
Cassidy says she is open to the idea of using a new bank to help GE raise fresh capital on the bond markets, but that the “bottom line is that we will never do a capital-markets deal with a bank that doesn’t have the underlying capabilities”.
“We may try a bank out in third or fourth position where we have three other strong underwriters, but for the most part banks know they get a fair shot of doing business with us,” she says.
Away from the capital raising, banks are playing a more valued role in helping treasurers to understand and navigate the rules and regulations around crucial areas such as liquidity, which has been one Cassidy’s main focuses since 2008.
“Some of the biggest changes for our team since the crisis are understanding the new rules as well as putting a lot more governance and controls over how we manage liquidity, how we manage our funding and ultimately how we operate with more intensity,” she says.
“We have had to learn the rules and regulations that banks have been subjected to for many years. As a finance company, we were not previously subjected to the bank rules and regulations as we are today. For example, GE is an end-user of derivatives; we don’t make markets or speculate. But as an end-user we are still subject to the new Dodd-Frank rules of clearing and collateral posting.”
Cassidy adds: “Systems are important and we have invested in technology and analytics. But there is still an important human judgement component to managing cash and liquidity. How we stress test our liquidity in order to make sure we have sufficient cash to survive very challenging market conditions with more severity is one of the most important lessons from the 2008 crisis.”
To help ensure this survival, GE now has a liquidity team that manages its cash and liquidity portfolio.
“We manage almost $70 billion dollars of cash, which is multiple times what we had before on the financial services side,” says Cassidy. “On the industrial side, it’s very much about GE’s global expansion into emerging markets and understanding local regulations about moving money in and out of a market.”
Here the banks can certainly help, but across the board Cassidy says she and her team can learn much from how banks have dealt with regulation over the years, and never more so than now. What’s interesting is that the relationship GE’s treasury has with its core banks has gone right up the chain of command.
“One of the areas that is important for us is the concept of best practice sharing,” says Cassidy. “All of the banks have big treasury operations, have been dealing with the regulators and operating in a regulated world for a long period of time. We can learn from them.
“Our relationships with the banks have broadened significantly and it’s not only the investment banking or the capital-markets teams – it’s the actual management of the bank itself and its treasury organization.”