By John Hintze
Several factors prompt banks to push for more of the corporate wallet.
Banks perpetually seek a greater share of their corporate clients’ “wallets.” And now it is a tendency corporate treasuries will increasingly have to contend with when renewing their revolving credit facilities, as new capital regulations unfold and Asian banks seek more of their business.
Banks have traditionally expanded the breadth of the products and services they sell to corporate clients by climbing up the commitment tiers in revolving credit lines. Those committing $500 million and sometimes more on multi-billion facilities are typically allotted additional, more lucrative business such as securities underwriting and foreign exchange, from the so-called corporate wallet.
Since commitments to revolving credits of investment-grade companies are rarely drawn, and returns on those commitments are miniscule, more burdensome capital requirements under Basel III are making it harder for banks to justify them without a greater share of that wallet. A long list of multinationals confronted that bank dilemma earlier this year when the often top-tier Royal Bank of Scotland (RBS) announced the selling of its loan portfolio to Japan’s Mizuho Financial Group, typically occupying a much lower tier in their bank groups.
“What we have communicated to Mizuho is they will not be a tier-one bank. We do not want to set a precedent that a bank can just come in and buy its way into our top tier,” said the treasurer of a major industrial company with a multi-billion-dollar credit facility that had counted RBS as a first-tier lender for more than a decade. “It’s just not the way it works, especially with a bank we don’t know well.”
When such changes arise, companies must reassess their bank relationships, finding ways to incent newcomers to strive to move up the ladder without upsetting old friends. Such situations will likely become more common for companies, not only because of new capital requirements pressuring some banks to exit the loan syndication market, but because macroeconomic shifts have made especially Asian banks eager for their business.
New regulatory requirements have made commercial lending particularly problematic for lenders without the scale to compete competitively in arenas such as bond underwriting, cash management and FX.
“If a bank is second- or third tier, and it mostly has a lending relationship, that’s becoming less and less attractive and banks must decide whether this relationship is economically viable,” said Chrystal Pozin, managing director at Treasury Strategies.
A treasurer of an international consumer-products company noted State Street had cited that reason for withdrawing from its facility earlier this year. State Street did not return inquiries seeking the extent of its withdrawal from the market.
RBS’s decision involved several factors. Now with less than half the $3.5 trillion-plus it once had on its balance sheet, the bank is majority-owned by the British government and has decided to retrench, focusing on UK retail and corporate clients. That new strategy, along with new regulatory and enhanced capital requirements in the US for foreign banks with at least $50bn in US non-branch assets, prompted it to announce the sale of $36.5bn North American loan commitments to Mizuho in February, and $5.6bn in late April. RBS has also sought to transfer several of its bankers to Mizuho.
Mizuho is following in the footsteps of two other major Japanese financial institutions, Mitsubishi UFH Financial Group and Sumitomo Mitsui Financial Group. Japanese banks have been significant players in the syndicated loan market for decades. However, in light of ultra low rates in Japan for years and especially in the wake of the Bank of Japan’s recent quantitative easing, they’ve accelerated their acquisitions.
Also seeking higher-tier positioning in corporates’ bank groups have been Chinese banks. So far in 2015 they rank 11th in terms of top lender nationalities for revolving credit facilities, up from 12th in first quarter 2014, according to Dealogic. Bank of China topped the list with 57 deals worth more than $6 billion.
The question then becomes how these banks can move up tiers when many of the top-tier positions have long been held by global financial institutions, sometimes for several decades. “The determining factor in my mind is what other value they will bring to our company,” said the treasurer of the consumer-products company.
The treasurer added that companies building up cash reserves may want more partners with which to invest those funds and diversify risk, and the same holds true for FX or interest-rate swap counterparties.