By Joseph Neu
Post-credit crisis bank-group analysis raises all types of share-of-wallet considerations for both treasurers and their banks. The focal point of these discussions, as indicated by recent discussions with The NeuGroup’s Treasurers’ Group of Thirty (T30), should increasingly turn to the profitability of the wallet shared. Or, more specifically, how does each bank view the profitability of each piece of business treasury has to give? The only way to know is to ask.
Better dialogue
Most treasurers have grown adept at knowing in detail each piece of business they allocate to each of their banks and how much the banks are charging for it. But pinpointing how profitable each piece of business is is still something treasurers would like to, and should, pursue further.
In a recent survey of the T30 members, treasurers expressed mixed insight into the profitability of business with banks, though 80 percent had at least some idea of bank profit on some pieces of their business. Better dialogue would help, since just 45 percent have regular conversations with the banks on the matter, and this dialogue is generally less detailed than any on share-of-wallet. Forty-eight percent said they had substantially or extremely detailed dialogue with lead partner banks on share-of-wallet across products and services vs. just 26 percent (and only substantially detailed) on profitability—from the bank’s perspective — across various products and services.
These results suggest that more “open kimono” discussion with banks is needed, where each side presents a detailed view of the P&L of their relationship.
Capital and liquidity charges
Having experienced a preview of such discussions at a recent T30 meeting, the first takeaway is twofold. First, the discussion will be as much about capital, and to some extent, liquidity charges that are in a state of flux due to banking regulations. Second, the discussion will reveal as much about the internal dynamics of how such charges are allocated and the various opinions from each part of the bank as to how appropriate their hurdle rates are.
Indeed, what the T30 discussion suggested was that, looking beyond the rating limits and nature of the business that makes up a customer’s wallet with the bank (e.g., is it an annuity or more of a one-off?), much comes down to the RAROC hurdle rate set by the bank’s ALCO and embedded in its funds- transfer-pricing model.
Beating this hurdle is highly determinative of whether foreign exchange, bond underwriting or cash management is seen as supporting a loss-making loan commitment. And, yes, bank relationships still tend to boil down to the credit commitment, and credit is still a loss-leader for banks.
Knowing what each banks’ hurdle rate is and how it might be adjusted, quantitatively or qualitatively, for each piece of business should thus be a critical topic for any treasurers’ bank relationship discussions. Certain banks, may be outside the norm on their hurdle rate, but they may also, for instance, overweight the value of a bond issuance as a contributor to profitability to help feed their investment bank. Knowing this can lead to better relationship management.
Taking dialogue to their model
Further, something these discussions will tend to reveal is doubt in the minds of key business or relationship managers at a bank regarding the “fairness” of their hurdle rate. They may already be pushing back on their ALCO or capital desk and, as a valued customer, you might just want to join in. “I’d be happy to talk to your ALCO,” was a suggested response of one T30 member.
Since bank treasurers play a key role in determining how banks allocate capital and liquidity, corporate treasurers may want to also speak to their banks’ treasurers. Approaching them for a peer discussion on the finer points of their funds transfer pricing model will yield helpful insight into your corporate treasury’s capital allocation approach as well as bank relationship discussions.
Ask them to differentiate between what really improves risk management and what just pleases regulators. Gaining such an understanding will also paint a fuller picture of the impact of unfolding regulations.