By Dwight Cass
But it’s now a two-way street: Banks are formalizing their tougher lines on relationship management.
The credit crisis taught treasurers some painful lessons in bank relationship management. Many are now taking those lessons to heart as they reshape their bank groups to shrink the ranks of their liquidity providers and to ask the ones that remain for bigger commitments. As credit becomes more available, corporates are once again on reasonably equal footing with their lenders, who can no longer demand outrageous share of wallet based on their “franchise values”. (See What’s Your Bank Worth, IT, December 2009.)
Banks, meanwhile, are formalizing their own increasingly tough criteria for who they want as clients, and their processes for approving deals. While this sounds forbidding, if both sides rationalize relationships intelligently, it could benefit all involved by establishing long-term, stable and appropriate partnerships.
CORPORATE CONSIDERATIONS
Prior to the crisis, corporates established more bank facilities than they might have needed because pricing was so tight (in the single-digit basis point range) that revolvers resembled nearly free options on liquidity. Post-crisis, with the cost of such facilities much higher and their terms tighter, counterparty risk issues top of mind and the desire to work more exclusively with banks that proved their mettle in the crisis, corporates are scaling back. The reworking of bank groups also allows them to build new relationships with lenders in regions where they see their businesses growing, say, in emerging markets. (See Infrastructure Firms Re-engineer for Global Shift, IT, March 2010.)
“You don’t want to take just a little from a bank, because you’re still going to have to take calls from them just to say ‘thanks but no thanks’ later on.” — MNC treasurer
Another driver, according to members of The NeuGroup’s treasury peer networks, is the need to more efficiently manage bank relationships, which favors having fewer institutions that are willing to provide bigger percentages of financings, rather than a host of banks that are only willing to step up for, say, 10 percent or less of a deal.
Banks, too, want to ensure they develop deep relationships with core clients where the extension of their balance sheets in the form of loans will be balanced by more profitable, less capital-intensive work like underwriting and M&A advisory. While this been a growing priority for banks ever since the advent of stricter capital requirements, commercial/investment banking consolidation and risk-adjusted business metrics, major banks are taking new steps to formalize their decision-making.
Representatives from one global bank recently described their new capital allocation committee to members of The NeuGroup’s Treasurers’ Group of Thirty. The committee looks at each transaction’s return in the context of the overall relationship. Representatives of the bank said that getting a transaction approved by this committee is often harder than getting it cleared by credit. “Most banks are having this sort of conversation about what client makes sense—it depends on footprint, geographic focus, etc.,” one banker said.
GETTING TO “YES”
So how do you get your transactions approved by these bodies? Unsurprisingly, they tend to look most kindly on deals that involve clients representing a substantial base of business over a long historical period. When someone’s wallet is lumpier and day-to-day transactions are small, it’s a harder sell. Treasurers can also keep the lines of communication open with their preferred lenders by score-carding their main five to ten banks and giving them feedback on the type of business they can expect.
But even for those corporates that have thrown a bank an apparently sizeable annuity over the years, it can be a tough road. That’s because a lot of businesses are hard to size up on a risk-adjusted return basis. Global transaction work, for example, has a huge upfront cost but a sizeable tail of returns, and it’s eminently scalable. Putting that sort of work in the mix with more obvious wins, like M&A or underwriting, may seem like apples and oranges, but those are the sorts of equations banks are trying to solve.