With negative interest rates the new normal in a number of regions in Europe, companies need to gird their cash management strategies to face the challenge of reducing the costs of cash sitting in their banks. But it’s not an easy thing to do judging by the experiences of companies in the NeuGroup network.
One important suggestion for treasurers who attended the The NeuGroup’s European Treasurers’ Peer Group meeting was to pay extra attention to operating balances just sitting around. Even for companies not burdened by lots of debt, the challenge is similar, as seen in the survey results across the NeuGroup Network: in a negative interest-rate environment, banks are increasingly reluctant to take deposits and in many cases will charge interest.
One EUROTPG member observed that his company, as a result of the negative rate environment, has been able to reduce the combined balances in 16 operating countries from about €200 million — which used to be “normal” – to around €30-50 million by using a combination of sweeping and swapping to USD (if economically sound; don’t take FX swap costs for negative IR cost), and engaging in a greater discussion on balances internally. Thus far it’s been a win-win as they’ve determined that some subs can operate on much lower balances and are now avoiding charges on those balances; and this will continue to be a win when interest rates go up again, he noted.
In a pre-meeting survey ahead of the EUROTPG, 46% of members said they were paying banks negative interest expense to take deposits (in negative interest‐rate jurisdictions) while 31% of members were drawing on bank funds to bring their net position with banks to a negative balance (or less net positive) to avoid paying interest. In The NeuGroup’s Treasurers’ Group of Mega-Caps (tMega), 57% percent of respondents to a pre-meeting survey said they draw on funds to get to a negative balance, while 21% are paying banks interest. Another 21% are making up for zero deposit floors, with additional wallet allocation to deposit banks. In general, tMega treasurers are addressing negative rates on bank loans (or potential for them), debt securities, swaps and/or intercompany loans by ensuring terms and conditions are two-way to safeguard interest-rate payment symmetry and/or accepting/inserting floor level rates in contracted terms and conditions
Another alternative is to speak up. NeuGroup members agree that there is also scope for pushing back on key banks to accept deposits without charging as part of an ongoing relationship. Banks need to accept some costs of doing business with you, after all (i.e, share of wallet above). The key is to communicate the company’s critical banking needs and accept that “give and take” is part of the process. If you have worked hard to reduce balances (see above), you could negotiate a cheaper or free overdraft facility with your core banks. Also stand firm when there are non-negotiable items like not being allowed to have negative balances over quarter-end, for example.