By Joseph Neu
Recent discussions with NeuGroup members on how they “score” their bank relationships point to how much the focus remains on each bank’s credit commitment. It’s still the case that treasury professionals care so much about paying for the credit commitments of each bank in their bank group that, as a rule, no business gets allocated to any other bank. Expecting a share of wallet commensurate with a credit commitment is how banks extend credit without asking corporate customers to pay a market price for it. It has been this way forever—even with attempts to stop it with anti-tying regulations—and it is unlikely to change.
The trouble is that it is becoming an increasingly onerous task for treasurers to allocate business so that each bank feels like it has been made whole on its credit commitment. And it will only get worse as bank regulations making capital dearer are adopted by more and more banks. Accordingly, now is the time to dilute the message that credit is the be-all and end-all.
Credit in proper context
In considering breaking some of the bonds of credit in a bank relationship, treasurers should factor in at least these two points:
- How vital is bank credit? For most investment grade corporates with access to the capital markets, the bank credit that guides their business allocation decisions is something of an insurance policy. Why then make their business relationships with banks so subservient to getting insurance at below market rates? Rating requirements to have a back-up line for a CP program don’t help, so there is also a bit of compliance cost.
On the flip-side, some corporates still rely substantially on bank credit. For them, steering ample business to banks that offer them credit might be critical in retaining access to that credit in a crisis—i.e., they really need the insurance.
As noted in “Optimizing the Mix of Relationship and Transaction Banks,” (IT, August 2013) there is a formula to help treasurers select the right types of banks. This same formula might guide share-of-wallet considerations: Feed those banks that you want to stay with you in a crisis and reduce the linkage with best-of -breed transactional banks.
- Are you communicating the value of other bank services appropriately? Scorecards and share-of -wallet analysis shared with banks tend to overmagnify the importance of the credit commitment in driving their business. This tells banks their other services are not as valued.
The more banks see the importance of the credit commitment in scorecards, and hear treasurers emphasize it, the more likely they are to consider cutting back on advisory and other “soft” services that they offer for the good of the customer relationship. Why not instead just allocate the spend on this toward the credit commitment?
As a practical matter, however, treasury staff will ensure that the banks they really rely on for operational needs, for example, find their way into the bank group. The credit commitment can then be essentially built into the price of the vital business offered by that bank. Thus, the facade of a credit linkage is maintained for the scorecard.
Similarly, treasurers will list items like quality of service and providing new ideas in the criteria used to allocate business, but the quantitative analysis that drives their business allocations remains closely linked to the credit commitment. In a typical approach, treasury will guesstimate the bank’s return on the capital invested in its credit commitment. Only the most sophisticated will also factor in the array of capital (and liquidity charges) that their banks bear on “ancillary” business.
In other words, lip-service to other criteria probably doesn’t send the same message about the value of bank services relative to the quantitative credit commitment scorecard items. Would it therefore make sense to try and quantify the value of some of these other services—e.g., new liquidity structure put in place with advice from bank X contributes Y million to the corporate bottom line?
Considering these two points, treasurers might balance out their relationship and business-allocation metrics to make it clearer to their banks that it is not all about the credit commitment. Just for the fun of it, they might also consider some analysis on what their market price of credit would be and the price of bank services unbundled from credit commitment considerations.