Several factors prompt banks to push for more of the corporate wallet.
Banks perpetually seek a greater share of their corporate clients’ “wallets.” And now it is a tendency corporate treasuries will increasingly have to contend with when renewing their revolving credit facilities, as new capital regulations unfold and Asian banks seek more of their business.
Banks have traditionally expanded the breadth of the products and services they sell to corporate clients by climbing up the commitment tiers in revolving credit lines. Those committing $500 million and sometimes more on multi-billion facilities are typically allotted additional, more lucrative business such as securities underwriting and foreign exchange, from the so-called corporate wallet.
Since commitments to revolving credits of investment-grade companies are rarely drawn, and returns on those commitments are miniscule, more burdensome capital requirements under Basel III are making it harder for banks to justify them without a greater share of that wallet. A long list of multinationals confronted that bank dilemma earlier this year when the often top-tier Royal Bank of Scotland (RBS) announced the selling of its loan portfolio to Japan’s Mizuho Financial Group, typically occupying a much lower tier in their bank groups.
“What we have communicated to Mizuho is they will not be a tier one bank. We do not want to set a precedent that a bank can just come in and buy its way into our top tier,” said the treasurer of a major industrial company with a multi-billion-dollar credit facility that had counted RBS as a first-tier lender for more than a decade. “It’s just not the way it works, especially with a bank we don’t know well.”
When such changes arise, companies must reassess their bank relationships, finding ways to incent newcomers to strive to move up the ladder without upsetting old friends. Such situations will likely become more common for companies, not only because of new capital requirements pressuring some banks to exit the loan syndication market, but because macro-economic shifts have made especially Asian banks eager for their business.
New regulatory requirements have made commercial lending particularly problematic for lenders without the scale to compete competitively in arenas such as bond underwriting, cash management and FX.
“If a bank is second or third tier, and it mostly has a lending relationship, that’s becoming less and less attractive and banks must decide whether this relationship is economically viable,” said Chrystal Pozin, managing director at Treasury Strategies.
A treasurer of an international consumer-products company noted State Street had cited that reason for withdrawing from its facility earlier this year. State Street did not return inquiries seeking the extent of its withdrawal from the market.
RBS’s decision involved several factors. Now with less than half the $3.5 trillion-plus it once had on its balance sheet, the bank is majority-owned by the British government and has decided to retrench, focusing on U.K. retail and corporate clients. That new strategy, along with new regulatory and enhanced capital requirements in the U.S. for foreign banks with at least $50 billion in U.S. non-branch assets, prompted it to announce selling $36.5 billion North American loan commitments to Mizuho in February, and $5.6 in late April. RBS has also sought to transfer several of its bankers to Mizuho.
Mizuho is following in the footsteps of two other major Japanese financial institutions, Mitsubishi UFH Financial Group and Sumitomo Mitsui Financial Group. Japanese banks have been significant players in the syndicated loan market for decades. However, in light of ultra low rates in Japan for years and especially in the wake of the Bank of Japan’s recent quantitative easing, they’ve accelerated their acquisitions of higher-return foreign assets.
Also seeking higher tier positioning in corporates’ bank groups have been Chinese banks. So far in 2015 they rank 11th in terms of top lender nationalities for revolving credit facilities, up from 12th in first quarter 2014, 15th in 2012, and 17th in 2007, according to Dealogic. Bank of China topped the list with 57 deals worth more than $6 billion, followed by Industrial Commercial Bank of China with 24 commitments worth nearly $1.4 billion.
The question then becomes how can these banks move up tiers when many of the top-tier positions have long been held by global financial institutions, sometimes for several decades.
“The determining factor in my mind is what other value will they bring to our company,” said the treasurer of the consumer-products company.
He added that companies building up cash reserves may want more partners with which to invest those funds and diversify risk, and the same holds true for FX or interest-rate swap counterparties. For companies looking to expand or open stores or offices in a certain country or region, a bank with branches there to handle payroll and other back-office functions may have an edge.
Large companies tend to seek longstanding bank partnerships, relationships that can be relied on in good and not-so-good times. Mizuho has participated in multinationals’ syndications for years, and has the scale to offer a wide variety of products and services. While its commitments have tended to rest in the lower tiers of loan syndications, it has developed the reputation as good to work with and reasonable in terms of its wallet demands.
“We spend a lot of time thinking about whether banks are getting adequate return for the commitments they make,” said the treasurer of the industrial company, with more than 20 bank participants across three tiers.
The company is currently recalibrating its bank group based on the addition of Mizuho. Although Mizuho is unlikely to take RBS’ first-tier position in the foreseeable future, its reputation has so far worked in its favor. “It’s likely it will be joining the bank group—it’s just a question of where,” the treasurer said.
To have made it this far means the bank has performed acceptably so far in the quantitative and qualitative analysis the company performs on each of its bank relationships. Once a year, the finance team seeks to quantify the return on capital committed by each bank that is generated from its share of the corporate wallet.
“We have a threshold we’re trying to hit, and the banks know that,” the treasurer said. “If a bank is in the third tier, it’s not going to get as much business in dollars compared to a first-tier bank.”
The quantitative analysis also considers the bank’s suit of products and services as well as its geographical footprint, which has justified including some regional banks into the company’s bank group.
Qualitatively, the finance team looks at the company’s overall relationship with the bank, including whether communication with the bank’s relationship manager is appropriate in terms of frequency and involves products that truly benefit the company. The treasurer noted that the analysis is not the sole determinant of a bank’s ranking in the bank group, but it serves to highlight whether, for example, a longtime tier-one bank is still pulling its weight or falling short in certain areas.
“You wouldn’t want a tier-one bank to end up at the bottom of you list, or even in the middle,” the treasurer said.