Peer Insight: The Asia Treasurers’ Peer Group 2013 Second Meeting
Asian markets are still the place to be for up and coming business, but managing banks, employees and treasury structure in the region requires new strategies.
As companies expand into Asia they encounter new challenges that require a reworking of treasury thinking, not least of which is China’s massive government-regulated market. Banking culture differs by country, so as more MNCs engage with more Asian banks, there will likely be missteps along side additional learning and hopefully opportunities for mutual understanding of each others needs. However, this is an ongoing process as corporates encounter new challenges in cash management, regional treasury structure, and the related adjustments that need to be made to both business and treasury strategies in order to take advantage of the opportunities Asia presents. Communication is key to all of this potential progress, both within organizations and among corporates, banks and regulators.
1) Future Vision on Asia-Specific Banking Needs. Asia is a dynamic region with populations, wealth and governments growing and shifting. Banking support must evolve to keep up with these changes.
Key Takeaway: Banks and corporates can mutually benefit from close cooperation and active dialogue. With open door policies and open minds, they can work more effectively to drive joint regulatory lobbying and regulatory consulting initiatives.
2) China Cash and Liquidity Management. Members remain keenly interested in the ongoing developments in China, particularly around the cross-border pooling pilots under way and the continuous updates and additions to related regulations.
Key Takeaway: China has made a substantial public commitment to liberalize the Renminbi, so one can expect there is great potential for the RMB to significantly change the Asia financial landscape over the next five years.
3) Cash-Flow Forecasting. Cash forecasting is a challenge even with the best tools. This session included a discussion on how members approach forecasting, particularly when faced with a lack of operational efficiency, automation, control and business support.
Key Takeaway: Automation frees up time and effort to focus on the underlying input data, to enhance both the data and the resulting forecast. However it becomes increasingly less effective as the time horizon extends.
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Future Vision on Asia-Specific Banking Needs
Asia is a dynamic region with populations, wealth and governments growing and shifting. Banking support must evolve to keep up with these changes. The banking industry is also changing with a wider distinction between capabilities of global banks and local/regional banks. Current trends show that correspondent banking is less appealing as a business line due to onerous Know-Your-Customer (KYC) and Asset-Liability-Management (ALM) rules and regulations governed through banking licenses.
Key Takeaways
1) Treasurers need to review bank panel. Treasurers see value in a global bank, but don’t want to be exposed to “too big to fail.” Corporates want to avoid concentration risk and therefore should review how many banks are needed globally. Two key considerations in such a review are doling out ancillary business and maintaining a plausible threat of moving business elsewhere.
Some local and regional banks are finding their way into bank groups. Many have niche strengths to serve specific markets, and sometimes have competitive advantages in supporting local business growth. Giving them due consideration may be beneficial.
2) Banks are preoccupied with managing higher liquidity coverage ratio requirements and capital ring-fencing. This has spurred banks to incorporate local subsidiaries in some jurisdictions, and offer innovative investment products to attract “sticky” cash balances on bank current accounts, and downplay traditional term deposits. As a result of capital ring-fencing, one can find divergent pricing for cash deposits across the world. For example USD deposits in some Asian countries can earn interest yield of 70-80bps instead of USD LIBOR rates which hover around 10-35bps for overnight to 6-month tenors. This presents an opportunity for corporates to pick selective countries/markets to park liquidity. One member noted a trend of corporates moving more liquidity from Europe to places like Singapore where there is more need for cash to support growing business requirements in Asia, and also a pick-up in interest yield.
3) Moving up the value curve using technology and advisory services. Banks are investing heavily in next generation bank client interface platforms, which will look and feel more like treasury management system (TMS) dashboards, and will have more emphasis on process work-flow. Banks are also working up the value curve by building out advisory teams. Advisory workshops can help banks and corporates come up with better solutions in conjunction with each other (rather than the traditional adversarial RFP process). Asian headquartered MNCs, which have had open-door policies to welcome banks to workshop and brainstorm with them by willingly sharing internal information, are benefitting from better solutions jointly designed through this kind of process conceptualization.
Asia Offers Variety in Treasury Organizations
A lot can be learned from how an organization structures itself and what functions are assigned where. This roundtable discussion was anchored on the results of the pre-meeting survey which highlighted that there is much variety among treasury organizations in Asia. Topics discussed include team size, scope of work (global functional vs. regional business support), reporting lines, and geographical responsibility.
KEY TAKEAWAYS
- Efficiency in “clustering” treasury operations. Grouping country responsibility and tasks in one team provides an opportunity to build regional expertise among team members, and enables mixing of experienced and junior team members. With groups of people, a team leader can match location with job scope and talent pool to organize the team optimally. One member revamped his team located in four sites, namely Bangalore, Malaysia, Shanghai and Singapore. He consolidated the “treasury business consultants” to Singapore for access to a talent pool with regional expertise, having four consultants covering about 50 countries. Malaysia and Shanghai are hubs for middle-office and back-office tasks to leverage on the lower salary ranges there, getting “2 for 1” in comparison with Singapore salary levels. Additionally, clustering aids operational risk management with sufficient back-up personnel and contingency planning brought about through a concentrated knowledge base.
- Tackle the blockers. One member raised an interesting challenge in his organization. There are certain positions where his efforts to create “through-flow,” that is, the opportunity to take a role for a period of time to learn the function, are thwarted. The thwarting comes from people who are content where they are and don’t want to change jobs. He refers to these individuals as “blockers.” These people are a hindrance to the development of others. However, another member said he was comfortable with “blockers” as long as they are adding value.
- Integration with business units brings value. Regionally placed treasury teams with proximity to business units bring financial expertise through vibrant banking community partnerships. However, at a rudimentary level, employees are guided by direct reporting lines (“Who does my performance review?” and “Who sets my performance objectives?”), and will correspondingly allocate time and effort to maximize individual performance. Therefore, it is important to navigate through the labyrinth of matrix structures, strategic business objectives and corporate headquarter goals, to ensure that regional treasury team members have project priorities and performance objectives aligned with all internal stakeholders to optimally support the business in-region.
outlook
Open door policies and open minds will enable corporates and banks to work more effectively to address challenges. Opportunities include joint regulatory lobbying and regulatory consulting initiatives, product co-creation, and driving improved standards in financial process workflows. Doing such activities in a pre-RFP environment with bank partners who “get it” may lead to pushing the envelope and shaping new industry solutions.
China Cash and Liquidity Management
Members continue to be interested in the ongoing developments in China, particularly around the cross-border pooling pilots underway and the continuous updates and additions to related regulations. In this session the group heard from three varied sources on these matters, a member, meeting sponsor SCB, and a special guest from the Monetary Authority of Singapore (MAS). Each has a different agenda and stake in the game regarding China. But all are inter-dependent with one another and therefore interested in each other’s views and experiences.
Key Takeaways
1) China has put a stake in the ground. The Chinese government has said publicly and repeatedly that they intend for Shanghai to be a global financial center by 2020. For this to happen, much has to occur in the next six years, including full convertibility of the RMB. Sing Chiong Leong, Assistant Managing Director with the MAS says that China has two key objectives for the RMB: provide capital and foster trade. While the second is occurring much more rapidly, Mr. Leong believes the RMB can significantly change Asia’s financial landscape over the next five years.
2) Look for win-win solutions with China. This was the advice of one member for getting approval to set up an offshore RMB lending arrangement. His company’s weak balance sheet in China did not meet requirements, so the initial request was denied. However, the team devised a scheme where they would lend RMB to their US headquarters who would in turn use the currency to pay China suppliers. This arrangement, achieved through patience and understanding of Chinese goals, should reduce costs to the company because it eliminates the need for suppliers to hedge their USD exposure.
3) Size + Growth = Success. This was the formula given by Carmen Ling, Managing Director with Standard Chartered Bank, for China to be successful at internationalizing their currency. She cites the Euro internationalizing in the 90s and the Yen doing the same in the 80s. However, she notes that the Yen has been a failure in this regard. Size alone is questionable but the greater issue is the lack of growth in Japan for many years. The euro also is a victim of stagnant growth in most of Europe. However, China scores well for both variables, and once they get their regulatory house in order their currency should do well in the global economy.
outlook
The RMB still has a long way to go before it is fully convertible and recognized as a global currency on par with the euro, yen or US dollar. But the China central bank is very clear-minded, focused and aggressive. The expectation is that there will be more RMB clearing arrangements in other countries such as Vietnam and Thailand. There will also be more experimentation with cross-border flows and more designated zones such as the recently announced free trade zone in Shanghai, where the trading rules are expected to be substantially relaxed. The goal is to liberalize the movement of money in and out of China with greater ease. China has made a substantial public commitment for 2020. You can bet they will do what is necessary to make it a reality.
Comparing Notes on Bank Experiences
Banks are strategic partners but often promise more than they actually deliver. As a result of member frustration with banks and simple curiosity about others’ experiences, they were eager to discuss what they believe are the strengths and weaknesses of their key service providers. This roundtable discussion was anchored by the pre-meeting survey where members scored their banks on a scale of 1 to 4 for characteristics such as relationship and service, product offering, operational service levels, geographical footprint and vision and leadership. The outcome of the scoring was presented to members, and there were some surprises.
KEY TAKEAWAYS
- It is the people at the bank that make or break the relationship. This was one of the explanations that could account for members having wildly different experiences from the same bank. A key difference was their respective account officers. “It comes down to the people and their ability to deliver the organization,” one member noted. Indeed, several members agreed that their same representative at a key bank was awful, which begs the question, “How do they stay employed?” The answer is, perhaps, that the person excels in other areas and may deliver better for the clients with more value to the bank.
- Your value to the bank also drives service levels. Bankers are motivated to deliver results for the bank. Therefore, it should be no surprise that the limited resources of an account officer are going to be directed most to those clients with the greatest revenue potential to the bank, and correspondingly, to the officer. Consequently, you may be a big company, but if you are not a big client and are not perceived to become one, you will likely get a lesser level of service.
- But there is also the credit factor. Members agree that banks that extend credit also get priority, all other things being equal, when it comes to doling out additional business or re-allocating existing business. However, it can be difficult to discern the clear choice, and one member explains: “Banks are going through a differentiation process because their products are all commodities. Service is no longer a factor and bankers are not as good as they were before,” he notes. He also pointedly notes the importance credit plays in the relationship: “Why should I buy products from banks who don’t give me credit?”
Cash-Flow Forecasting
Cash-flow forecasting is a challenge even with the best tools. For some it is a “painful” exercise when one is dependent on business stakeholders to contribute inputs, or when data compilation is manual or semi-manual. It is also a challenge when there is a constant battle to reconcile between top-down and bottom-up forecast approaches.
Key Takeaways
1) Variances and trends say a lot. Concentrating on variance analysis and trend analysis can offer significant value to macro view planning, so at times there is less need for perfect accuracy.
2) Accountability improves accuracy. Making accountability matter for the data contributor goes a long way to improve the accuracy of cash-flow forecasting. At times, this may require an internal bureaucracy to enable business units to access funding from corporate treasury – perhaps this is deemed a necessary evil within some organizations. One member notes that “there is more heat for the more capital-consuming BUs” to provide accurate forecast data.
3) Pools require accurate forecasting. One very active forecaster noted that her variety of forecasting tenors each have a different purpose, but the daily forecast is driven by the need to manage her global cash pools. Victor Penna from SCB affirms that companies running cash pools have a greater need for tighter cash management processes.
4) From stability to hopelessness. The ease with which forecasting is accomplished is impacted by a number of variables, including the level of automation, amount of accountability at the business unit level, processes for paying and collecting, but also the business/industry itself. One fortunate member noted that while his forecasting process is very manual, his overall business is “pretty steady and predictable.” On the other hand, the commodities and farming business of another company is affected by many uncontrollable and one large controllable variable, which is that they pay 20 percent of their income to shareholders. The uncontrollable variables of crop and harvest efficiency and commodity prices make forecasting a “completely hopeless exercise,” according to the member. This volatility drives his team more toward ensuring liquidity than nailing a forecast.
outlook
Today, there are treasury management systems (TMS), ERP systems, and bank-provided software that can assist in cash-flow forecasting, with many systems offering simulation features and self-learning capabilities. However, it is debatable how reliable and useful these can be. One can question if it is appropriate to infer future cash-flow forecasting based on system generated self-learned adjustments built on historical data, especially when the business is constantly evolving. Then there is the challenge of data-feeds into such systems to enable the cash-flow forecasting feature. Thus, such systems need to be nimble to be useful. The higher priority to improve cash-flow forecasting would be to enhance the input data quality by understanding the underlying determinants of the input data.
CONCLUSION & OUTLOOK
The fifth meeting of the ATPG–Singapore was a very engaging one with robust discussions and informative presentations from members and sponsor about their approaches and thoughts on the agenda topics.
The group was pleased to have Standard Chartered Bank as a first-time sponsor and look forward to having them back in the future. The next meeting will be in May 19-20, 2014, hosted by HP and sponsored by ANZ Bank.