By Bryan Richardson
Having effective tools to measure and track the extent of your bank relationship and the level of service the bank provides is a key ingredient to successfully managing bank partners.
Bank partners are some of the most important relationships for a business. And selecting and effectively managing the right ones is a critical role that treasury plays. Therefore, effective tools are needed to measure and track the extent of the bank relationship as well as the level of service they are providing.
What’s more, treasury’s banking responsibilities are becoming even more important as the new capital requirements from the Dodd-Frank Act and Basel III regulations drive banks to deploy their capital much more selectively, resulting in more scrutiny on whom they do business with and how much business they do.
However, depending on who you are and the amount of clout you have, two can play the game of being choosy. Companies have been responding to this new environment by also being more selective about who their bank partners are. At a recent meeting of The NeuGroup’s Assistant Treasurers’ Group of Thirty (AT30), members engaged in a substantial discussion on bank partners, sharing examples of how they maintain and manage bank relationships and how they make decisions when bank groups need to be downsized or increased. Following are highlights that address some of the key considerations in the decisions of which banks to keep, add or move along.
what Matters to Treasury
Big decisions regarding the addition or removal of a bank, the award of additional business, or reduction of business cannot be made flippantly. Conversely, they should be made based on objective data that can be defended against challenge. According to a pre-meeting survey of the AT30, the element that is measured most is simply the allocation of business with their banks. The other common measure, the performance report card, is performed much less frequently. The report card tends to be more qualitative and anecdotal in nature, relying on input from many sources. The share-of-wallet analysis, on the other hand, is more data-oriented and useful in revealing what business banks have and determining how to reallocate that business when necessary.
There are split views on whether or not to share this type of information with banks. Those who do expect that this action will help develop, deepen and improve those key relationships. Sharing the data can communicate that the bank is important enough for the client to go to this trouble; it also communicates that the client is watching and is serious about having strong healthy relationships. Those banks that value the strategic relationship take it seriously and value the feedback.
“We love to receive this feedback,” said one banker at the AT30 meeting. One member added that some banks “are more interested in this input than others,” which in itself is insightful about your bank partners. The ultimate goal of sharing this information with banks is to increase the level of transparency between the two organizations.
Those who elect not to share the information believe it may weaken their position with their banks, or that it may drive undesirable behavior on the part of the bank. For example, if a bank knows that it is number five on the list it may increase the pressure for more business or scale back its commitment to the client.
How much do they make?
Naturally, a bank partner is not going to share their profit margins with their clients, and especially their profitability on their relationship with your company. But imagine the value this information could have to your management of the relationship. If you knew their margins were particularly low then you would know to press them and you would know to press them if you knew the opposite were true.
Knowing the answer to this question is important enough to some practitioners that they have taken steps to figure it out. One company has devised the following calculation they believe gets them close to the answer and have found useful. Here are other considerations. (See figure 1.)
Ask the bank what it wants. Practitioners often refer to their banks as “partners,” but a productive partnership considers the interests of the other party. Therefore, it is prudent to at least know what business the bank wants most from your organization. Banks have a variety of product offerings, which vary by profitability, level of competence and relevance to the client. Practitioners and bankers agree that there should be a discussion about the business banks want most from a client. For example, clients often assume lockbox services is a desirable piece of business for banks when in fact it is not.
Credit—a key relational ingredient—new questions about its role. It is no surprise to hear a treasury practitioner say, “we award business only to banks in our credit group,” or “it is a challenge to keep all of our banks happy with sufficient business.” It is for that reason that some are challenging the industry practice of banks using credit as a loss leader and then clamoring for the real revenue-generating business. Why not simply price the credit accordingly and therefore not be so dependent on the other sources of business? This could end up in higher costs for corporates but less headaches with managing relationships.
Further, many companies have credit facilities that are not even needed, much less used, and simply function as a security blanket in the event of an unforeseen hit to liquidity. Is it prudent then to eliminate or downsize the credit? One practitioner thinks not. Her team had previously considered eliminating their revolving credit facility since they have never used it and don’t expect to. But they chose not to do it because they like the idea of banks paying attention to them and watching, so that there is always familiarity in the event there is an unexpected need.
When it’s time to reshuffle the bank deck. Large MNCs continue to re-engineer banking relationships around the globe. In designing an optimal banking structure, liquidity optimization is usually a driver but other key considerations, in addition to those discussed above, include costs, counterparty risk management, and supporting the needs of the operating business. However, in more recent years, the components of the regulatory avalanche are also weighing on the decisions. Below are some salient points to consider, offered by practitioners, as you evaluate who should and shouldn’t be in your bank lineup. (Also see figure 2 below.)
Consolidation considerations
- Less is more. Keeping every bank happy is a tough job, if not impossible. Being able to spread the wallet across fewer banks is one of the positive by-products of a bank consolidation. There is also less time required by treasury as there are fewer bankers you need to meet with.
- A meeting of the treasury minds. In addition to the quantitative scorecard and share-of-wallet analysis, a qualitative exercise can be useful to identify the banks to keep and lose. An approach one company takes is to have each key person in treasury prepare a list of their “top 10” banks based on their function and experiences with the banks. The AT then aggregates everyone’s input with a score to arrive at a collective “top 10.” In this case it was interesting how aligned the team was on their experiences with their banks.
- The credit message: “Step it up.” When a company determines they need to reduce their bank group, banks should understand that they stand to benefit from fewer competitors for the limited business. In exchange, the remaining banks should be asked to increase their credit commitments. One company took this approach and experienced an oversubscription to their new credit deal.
- Credit is the price of admission but no guarantee. This is the view among most treasury leaders who utilize bank credit. As previously mentioned, many companies confine their ancillary business awards to those banks that have committed credit. However, ancillary business is not a given. Prudent companies still go through the RFP process and awards are based on the merits of the banks’ proposals. But if all things are essentially equal between two competitors, the award will go to the bank with the lesser amount of current business.
- Adding strategically. In a bank consolidation initiative the goal isn’t necessarily about just reducing banks. Getting rid of low-value banks opens the door to adding more strategic banks to the mix. In the case of one practitioner, 10 banks were dropped but two were added that the team felt could bring additional value. Another company elected to add a Chinese bank to their group in anticipation of growing business in that country.
Bank relationship management has been a prominent topic for decades. But given the major shift in regulatory requirements that will impact credit availability and bank fees, it will truly be an area that requires heightened attention in the coming years.
Many banks warn they will be focusing more on their strategic clients and that it could be at the expense of those clients who are not considered strategic. This view of the banks will require treasury to ensure it is keeping the right banks and keeping those banks happy.