When positions are entrenched it’s hard to come to a compromise. That’s where corporations and their banks find themselves these days. On the one hand there are corporations with fewer and fewer places to safely park their operational cash. On the other, banks, hemmed in by regulations and thinning margins, are pulling back on offerings, pulling out of regions, and sometimes pulling the rug out from under corporates by telling them to take their money somewhere else.
But both sides, client and bank, need to see the big picture. At a fall NeuGroup Assistant Treasurers’ Peer Group meeting, one banker described how companies are viewed by banks. He began by informing the group that because of the increased capital requirements imposed by regulations, credit approval now also includes capital approval. Therefore, banks have to build the business case around the overall relationship to justify the credit extension and corresponding capital reserve, aside from establishing credit-worthiness. There are a lot of bank-service buying centers within large companies and treasury should be aware of them. He went on to explain that client bankers have to have credibility internally, which comes from accurate projections of client business. “It is important for clients to look at the full suite of banking services and drive business to their credit banks,” he noted.
From the client perspective, members take the view that banks still have to earn the business they are requesting and be realistic in their expectations. One member advises his banks to not over-commit to the revolver if he doesn’t think he can provide sufficient ancillary business. And if banks decide the relationship isn’t working for them then this company is happy to “return them to prospect status.”
And there are the undesirables, as in the business banks no longer have an interest in (or the business they’re thinking of jettisoning. One member asked the bankers present at the meeting if credit “is really a loss leader.” Yes was the resounding answer. “Unfunded revolvers are a negative return” because capital has to be reserved, the member was told. Other loss leaders include banking center deposits and vault services, plus the age-old service of lockbox processing. Most surprisingly, however, is how cash deposits have gone out of favor, particularly at the end of a quarter. Numerous stories were shared by both members and bankers calling clients at the end of the quarter asking them to relocate certain amounts of cash elsewhere.
What Banks Want
So what is advice from banks to clients? Here are four areas bankers encourage members to focus on:
1. Align and consolidate your deposits and payments. As noted above, banks are happy to hold some types of deposits, specifically operating balances, but are not interested in high-volume low-value banking center or vault deposits. They are looking to reduce operating costs, so fewer transactions are better.
2. Improve cash-flow forecasting. One might wonder why a bank cares about your forecasting activities. The reason comes down to the cash deposits issue. Banks do not want to be surprised with an unexpected influx of deposits at quarter end or any other time that might be inconvenient. Quality forecasting enables the customer to communicate their cash-flow expectations to banks.
3. Invest in off-balance sheet products. Credit is no longer the issue at banks. Managing the balance sheet is the issue. There is a cost to taking deposits. The bank has to hold 6 percent of their capital against it.
4. Collaboration. Strive for a higher level of open communication between the you and bank. “The bank is looking for a holistic relationship with a lot of touchpoints,” a banker noted.
Despite this good guidance it’s always good to ask relationship banks directly as to what they want. Unfortunately you may get a rather nebulous answer as many bankers are currently in limbo. “Something has gone terribly wrong with the system,” said one AT30 member who had been told by a bank that certain depository services would no longer be provided. If not quite broken, the banking sector is in upheaval, and that situation is likely far from over. Add this to the low rate environment and banks will be struggling for the foreseeable future and passing their pain on to customers.