By Joseph Neu
Corporate banks are being pressured on multiple fronts and the changes being implemented in response will challengetreasurers’ bank relationship management. Dialogue could find a path to value for both sides going forward.
Given the high-impact change going on in corporatebanking, you would think that treasurers might have bankrelationship management as a higher priority. Accordingto NeuGroup Peer Research, however, just 1% of membertreasurers listed it as a top project or priority at the start ofthe year. This lack of priority may not last, however, as thetrends impacting corporate banks start to bite.
OPERATIONAL IMPACTS
Looking at treasury operations managers, we see them giving a high priority to banking relationships. The NeuGroup’s Global Cash and Banking Group members (see chart below), indicate bank account management (46%) and bank relationships/ exposure (35%) among their top three priorities. One explanation for this is that regulation followed by negative interest rates have already adversely affected treasury operations management.
First with KYC-compliance edicts that make the simple task of opening a bank account a months-long ordeal and then with liquidity and capital regulation under the umbrella of Basel III that have made it more difficult for banks to accept large, short-term deposits. They have also made it difficult to profitably operate certain forms of cash pools and related liquidity management structures. Layer on negative interest rates in key jurisdictions like the Eurozone and the changing corporate banking landscape becomes a growing priority for treasury operations managers.
Still, the Deutsche Bank-sponsored GCBG meeting in May revealed that 85% of members are still not fundamentally changing their approach to bank relationships in light of Basel III. Most are focused on fundamental tactical issues: (1) fairly dividing the treasury wallet; (2) dealing with frequent coverage changes; (3) dealing with inconsistent levels of coverage; (4) managing the disparity of product and systems capabilities across banking partners; and (5) coping with bank account management and layer after layer of compliance headaches banks are imposing on opening, operating and closing accounts. All are growing more challenging.
When it comes to the big picture—namely, the value proposition of their relationship—little frank discussion seems to be taking place. Few GCBG members have seen relationships terminated due to the reduced value of their relationship to the bank and, if there has been communication of changes in relationship value by their banks it has been either positive or selectively positive (see charts below). This result reflects the large-corporate, investment-grade demographic of NeuGroup member firms, which arguably will be the last to be impacted by the changes impacting corporate banks. But it also potentially signals banks’reluctance to tell customers they are less important or thatchanges to the relationship are needed.
STRATEGIC TREASURY IMPACTS
At some point the operational impacts from the changing corporate banking landscape will become strategic priorities. Until then, it pays for treasurers to consider some of the high-level, strategic challenges facing their corporate banking partners. The first to consider is the impact on banks as a source of funding. While banks are still stepping up with credit facilities and bridge financing, their ability to do this is increasingly contingent on increasing their share of wallet to offset the higher capital charges of offering credit. As noted in “Funding Strategies in Uncharted Territory” in the August issue of iTreasurer, one reason the majority of NeuGroup funding discussions in H1 focused on debt capital markets may be that banks continue to be willing to offer credit to investmentgrade corporates on very reasonable terms, despite all the bank regulation making it more costly for them to do so.
However, as a webinar produced in conjunction with HSBC in late May highlighted, the regulatory impact on bank credit pricing and availability has been phased in and the most biting requirements are still to come. And while direct pricing may be the last thing to adjust to the new rules, corporate treasurers are increasingly becoming aware of how much more aggressive banks are getting in asking for wallet to help compensate them for use of their balance sheet (and liquidity). This is true even for use of bank balance sheets and liquidity that some corporates don’t need.
“As for Basel and RCFs [revolving credit facilities], we’ve studied this in quite a bit of detail,” noted one treasurer from a cash-rich mega-cap company, “and we don’t expect banks to adapt their undrawn pricing despite the increasing regulatory costs.” Instead, “they will just put more pressure on us for ancillary business—business that doesn’t exist.” According to the treasurer, a likely victim will be the corporate commercial paper program, which as a cash-rich corporate it can likely drop in order to avoid the need for a revolver back up that will never be drawn. Or, the rating agencies will have to allow corporates “to get freed up from the RCF requirement.”
Given banks’ increasing demands for business that corporates don’t have to give, as treasurers look to allocate wallet and manage their bank relationships, it becomes increasingly important that they understand how the rules impact each type of bank and business line and consider this in wallet allocation and bank-group targeting going forward.
The reality is that regulation impacts different banks differently. Speaking to The NeuGroup’s Tech20 Treasurers’ Group in May, Peter Serene, Director, Senior Product Manager, Global Liquidity Products at Bank of America Merrill Lynch, noted that, post-Basel III, banks have a number of touch points involving their capital, liquidity and leverage regulation that affect each of them differently. “Some banks are heavily funded by deposits, for example, while others are looking to increase their deposit funding,” he noted, just as “certain banks have capital to burn, while competing banks need to raise additional capital.” The same can be said for leverage. “Knowing where each bank is with regard to these touch points will help explain its behavior.”