That Ol’ Share-of-Wallet Issue

NeuGroup’s Assistant Treasurers’ Leadership Group tackles managing banks and the corporate wallet.

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Banking Relations

That Ol’ Share-of-Wallet Issue

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January 16, 2019

By John Hintze

NeuGroup’s Assistant Treasurers’ Leadership Group tackles managing banks and the corporate wallet. 

What are banks’ returns on the services they provide, what does that mean in terms of divvying up the corporate wallet, and do other treasury executives also feel they do most of the work when it comes to syndicating their companies’ loans?

Those were questions addressed by members of the NeuGroup’s Assistant Treasurers’ Leadership Group (ATLG) at a recent meeting where one member led the discussion and brought peers up to date on the latest syndicated-loan statistics. She also detailed her company’s approach to estimating bank returns and divvying up its wallet accordingly.

Referring to data provided to her by two top US banks, the ATLG member noted that syndicated facilities between $500 million and $1 billion in size typically have 12 banks, although surprisingly that number jumped to more than 20 for five of the 154 deals in that category. Deals that size average three joint lead arrangers holding a collective 41%.

The average number of banks in syndicated loans ranging in size from $1 billion to $1.49 billion increases to 14.5, with nine of the 99 deals in that size range involving more than 20 banks. The number of joint lead arrangers increases to four, and they typically hold 42% of the facility. At the $1.5 billion mark, the number of banks in those 45 facilities increases to 15.5, with 20 banks or more in six of them, and the number of joint leader arrangers increases to five, cumulatively holding 45% of the deal.

For facilities between $1.51 billion and $2 billion, the number of banks in the syndication increases to 18, while the number of lead arrangers totals to five. On average, the joint lead arrangers cumulatively hold 41% of the facility.

Surprise, Surprise

The session leader noted her surprise regarding the relatively high percentage of $1.5 billion deals with more than 20 banks in them. She said her company’s credit fits into the largest tier size, and it has 16 banks—a bit below average—while the joint lead arrangers hold a bit more of the credit than the average.

“That caused me to think about whether I should increase by one the number of joint lead arrangers, so the credit commitments from the current four aren’t as high,” she said. “I receive feedback from some of the lead banks that they’re not necessarily earning sufficient fees to meet internal return hurdles.”

Another ATLG member noted that his company’s five joint leads hold 51% of the facility, giving them a majority vote. That group also earns a bigger percentage of the company’s wallet and is expected to step up when need arises. “We figure the top banks is where the dry powder is…. If we’re doing M&A and need a bridge loan, we only need four or five banks,” he said.

Another participant, however, noted his company stays below that threshold to reduce concentration risk.

Dividing the Corporate Wallet

A perpetual issue among treasury executives is how to divvy up the corporate wallet among their companies’ banks.

The session leader said her team first identifies the services each bank in its syndicate is providing and the fees each is collecting. Complications arise in calculating fees because banks may earn them indirectly on services such as credit card programs, so her team seeks to estimate them as accurately as possible.

Another ATLG member quipped that a bank that complained about low returns on the FX business his company had just awarded it “noticed right away when we started moving that business away to a rival.”

The session leader’s treasury team also determines the optimal fees the company should pay by determining a bank’s share of the corporate wallet according to the percentage of credit it provides, and then it compares the estimated and optimal fees.

“One of the banks is always in the red. They provide one of the services we can’t directly measure but we know is very valuable,” she said.

She added that a significant gap between estimated and optimal fees compared to other banks similarly positioned in the syndication may suggest the company is at risk of losing that lender unless it is given more business or perhaps moved to a lower tier.

She added that she has talked to many of her company’s relationship banks about how they measure returns and learned that banks typically have their own proprietary models for calculating the required returns on committed capital necessary to meet internal hurdle ratios. Several indicated that a good measure of return on capital involves estimating bank net income (bank fees earned minus liquidity charges required under the Basel rules, allocated expenses and taxes) as a percent of risk-based capital. Ultimately, banks seek to provide services in which their capital requirements are low and returns high, such as share repurchase programs, M&A, securities underwriting and cash management.

Other products and services may be less appealing in terms of capital requirements and returns. However, they’re a part of the mix that, in a hypothetical exampled offered by the session leader, provides syndicate banks with returns between 8% and 18%.

Share-of-Wallet Worksheet

They’ll Take It

Acknowledging the example’s many underlying assumptions, the session leader noted that banks are likely to be very satisfied with a return of 18% and satisfied with a return somewhere between 12% and 15%. “But we don’t know what it is precisely; every bank does it differently,” she added.

An executive at Bloomberg, which sponsored the ATLG meeting, said that the bank he used to work at targeted a return of 14%.

The session leader emphasized the importance of frequent conversations with bank relationship managers regarding their satisfaction with the relationship and the returns they are earning. She added that one takeaway from those conversations is that while banks certainly want to provide high-return products and services, their credit committees have additional priorities.

“Credit committees want to know how many touch points the bank has with the company. They want to see diversity in the relationship,” she said.

One issue most ATLG members agreed on is that, ultimately, it’s corporate treasury that does most of the work syndicating a loan.

“I feel like we do the syndication,” said one, prompting fellow participants’ laughter. “We spend nine months teeing it off, then bring in the joint leads to sign the book."

Banking Services Capital Requirement and Returns

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