Striving for Operational Excellence in the Face of Changing Markets, Rules

Members are trying to figure out how to keep moving forward on the path to accuracy and efficiency while dealing with the current market environment of low interest rates, a strong dollar and regulatory changes. 

GCBG members continue to chip away at being operationally efficient, even with low rates, a strong buck and regulations standing in the way. Deutsche Bank discussed the implications of negative interest rates for banks and corporates, which highlighted the need for improved cash-forecasting accuracy and efficient cash structures. Also, the discussion on negative interest rates emphasized the need for corporates to understand Basel III–related costs and implications for banks, which tied into the dialogue on bank relationship management and share-of-wallet calculation.

1) How to Achieve Cash-Forecasting Excellence: The cost of inaccuracy has become more evident as banks refuse or limit deposits or charge negative interest rates on them. And some tools available can analyze/categorize actuals and extrapolate trends, but they cannot yet capture the “tribal” knowledge needed to generate accurate forecasts.

2) Bank Relationships and Share-of-Wallet Calculation: If a bank does not have the right capabilities at the right price, all bets are off in this very cost efficiency-driven environment.

3) Negative Interest Rates in Europe — Implications for Banks and Corporates: Besides any actions you can take on the operational side, it is critical to also understand where your bank is coming from to improve your negotiating position and achieve a mutually accommodating solution.

How to Achieve Cash-Forecasting Excellence

Improving cash-forecasting processes and accuracy has become the main focus on a growing list of treasury priorities. Accuracy has been long sought after but rarely achieved, and the process has not followed the automation trend other processes have.

Key Takeaways

1) Cash forecasting is as critical as ever. Cash forecasting accuracy has been long sought after because without it, corporates ended up holding excess cash, which had an opportunity cost. Nowadays, the cost of inaccuracy has become more evident as banks limit, charge a fee (a result of negative rates) or in some cases refuse deposits.

2) Companies do a pretty good job of forecasting cash in the short term. As per results of the GCBG research survey, more than 64 percent of members were able to predict very accurately their next-day cash. However, this accuracy decreased dramatically for those attempting to forecast cash for longer periods. It is also important to mention that only half of respondents attempted to forecast cash one year out.

3) But the process is still more of an art than a science. Cash-forecasting processes have not followed the automation trend other processes have, largely remaining in Excel spreadsheets. Although there are better tools to analyze/categorize actuals and extrapolate trends, these tools cannot yet capture the business and “tribal” knowledge needed to generate accurate forecasts.

4) And some of the “tribal” knowledge is outside of treasury. Although treasury depends on other groups in the organization for data and knowledge, those groups may have competing priorities, so it is hard to get them invested in the process. Try to align objectives across organizations. One member mentioned that they use their in-house bank structure to align objectives: business units that need additional funding, or less funding than was forecasted, get penalized on the rates that are applied to their funding or investments.

5) When deciding forecast schedules and presentation, consider your audience and their needs. As per the GCBG research survey, cash forecasting is mainly used by the treasury organization and the CFO. This aligns with the main reason why companies forecast cash:

• Short term: to allow for day-to-day cash positioning and investing/borrowing
• Medium term: to improve liquidity/funding planning,
• Long term: to respond to management focus.

Present the information keeping these objectives in mind, so the information becomes actionable and relevant. For example, location and accessibility of the cash is as important to understand as how much cash will be there at the end of the quarter.

6) Plan ahead. Standardize your processes without making data irrelevant or oversimplified. Time spent trying to simplify, standardize and automate the cash-forecasting process frees resources that can be used in value-added activities like trying to understand trends in the forecast instead of creating the forecast itself. Sometimes, too much detail in the data can be viewed as unnecessary and a more consolidated view can generate the same results at a faster pace. Take advantage of that, but keep in mind that as technology evolves and more efficient and cost-effective predictive tools enter the market, there will be value in being able to access the details.

Outlook

The renewed focus on cash-forecasting accuracy and efficiency will continue to be top-of-mind for treasury professionals. This is one area in which automation has not caught up yet. But longer term, as the cost of automation and of processing big loads of data continues to decrease and investments start to mature, cash forecasting can be where most advances can be made.

Bank Relationships and Share-of-Wallet Calculation

GCBC members are seeking ways to most efficiently manage bank relationships and how to best allocate business to their bank partners. Two group members shared their organizations’ approaches to share-of-wallet calculation.

Key Takeaways

1) Banks’ level of commitment is critical when assigning business, as long as the price is right. The length of a relationship and strength of support, in good times and bad, are the first things corporates look at when deciding how to fairly split their business among their banks. However, regardless of the many different techniques corporates use to quantify and ensure a fair share of wallet, if a bank does not have the right capabilities at the right price, all bets are off the table in this very cost- and efficiency-driven environment.

2) Put yourself in your bank’s shoes. Although a difficult exercise, it is interesting to try to understand the value that you bring as a client to your banking partners beyond calculating a share-of-wallet. It helps to understand when a business is becoming too unprofitable for your bank or when a credit commitment is too high, so you can strategize about bringing in a replacement and what to do next. It is especially critical in the current environment in which banks are becoming more selective regarding which companies to work with.

3) It is in the not-so-good times that you know who your real friends are. If your business is booming and your share price is going up, banks will be lining up at your door. It is when things are not going your way or are just more stable that you know which banking partners are really committed to working with you.

Outlook

Although ensuring that you are splitting your business fairly will continue to be critical, understanding how much profitability you bring to your banking partners by line of business will become increasingly important in the wake of Basel III.

Negative Interest Rates in Europe — Implications for Banks and Corporates

The negative interest rates in EUR and CHF, and the continued low inflation (or even deflationary) outlook in Europe, means that negative deposit rates could be with us for a while. This has major implications for the short-term deposit book of banks and, in turn, corporates. This session provided members with a walk-through of those implications, as well as current considerations for cash managers.

Key Takeaways

1) Low interest rates are here to stay. Neither members nor Deutsche Bank expect the current low/negative interest-rate environment to go away anytime soon. The research survey showed that over 70 percent of members expect rates to stay low for at least three years.

2) Accepting deposits has become expensive for banks. Deutsche Bank highlighted that “recent steps in monetary policy have resulted in an unprecedented landscape of negative rates for many European currencies,” which have spilled over to traditional corporate investment options like MMF and sovereign yields. In this context, European banks have to pay for overnight deposits held with the ECB or get very small or negative return in alternate investments.

3) . . . And Basel III jacks up the price. Basel III introduced new Liquidity Coverage Ratio (LCR) requirements to ensure banks have enough liquidity to manage a cash run-off in a 30-day period. This means that the expected run-off rate will need to be offset by the bank holding low-return High Quality Liquid Assets (HQLA). The run-off rate varies depending on the industry sector of the depositor (corporates vs. financial institutions), the term of the deposit (under 30 days vs. over 30 days) and the usage of the funds (operating vs. non-operating), with little clarification on how to define the latter, which in turn leads to different interpretations from bank to bank.

Also, Basel III introduced a new leverage ratio to prevent banks from over- leveraging their balance sheet. Although not fully implemented yet, both changes increase the banks’ cost of holding deposits and providing financing in the long-term, and banks are already preparing for that.

Under these circumstances, banks are less interested in the now less-profitable cash management business and manage it in the context of a larger business relationship with the client. Also, overlay notional pooling structures are becoming too expensive to offer and are being analyzed in the same context.

4) There are implications for corporates too. Corporates are holding more cash than ever in an environment in which too much cash reduces their negotiating power. The previously sticky cash management business is becoming unattractive. This means that cash managers cannot use this business to reward banks. According to the GCBG research survey, 50 percent of members reported being charged for deposits, while another 28 percent reported having avoided the charge by taking action to reduce cash or negotiating an alternative solution with their bankers. Some of the actions taken were moving cash into money markets/investment accounts or swapping-out currencies. Also, some members used time deposits or call deposits to avoid the LCR 30-day limit. Other companies opened additional bank accounts to spread cash and stay within certain limits negotiated with banks.

5) Corporates must take action and understand the reasoning behind banks’ negotiating positions. Corporates must take measures to deal with a situation that is expected to last. However, it is critical to also understand where your bank is coming from to improve your negotiating position and achieve a mutually accommodating solution. In the short term, some recommendations are to improve cash-forecasting capabilities, implement cash structures to reduce idle cash, look at alternative investments or negotiate ERCs. It is also recommended to revisit the share-of-wallet approach and investment policies to keep up with the current market environment. Long term, corporates should re-evaluate their liquidity structure and banking partners. Under the new paradigm and anticipated changes in tax regulations, is your liquidity structure still the best fit? And, as banks look to streamline relationships, will you still have some negotiating power with your current bank group or do you need to reshuffle too?

Outlook

Negative/low interest rates and changes in regulations are making deposits too expensive for banks to hold and complicated structures are becoming increasingly costly and unprofitable, thus possibly headed to extinction. This may have major implications for your liquidity structures long term, especially when combined with other changes like the OECD’s BEPS initiative. Also, be on the lookout for more implications of Basel III in banking services/products, like credit availability.