By Anne Friberg
Is your bank serving you well and at the right price? And vice versa?
In light of new banking rules (Basel III, stress tests), banks are looking extra close at the risks they are taking on with their choice of clients, and how much they earn on those relationships (for a tangible example, see Jamie Dimon’s letter to JP Morgan’s shareholders this year). Likewise, corporates are looking at how well their banks serve them and how committed banks are to their business long-term.
Regardless of the odd golf outing or concert ticket from your banker, what they really want to know is: “What have you done for us lately?” The responsible treasurer should also ask: “Have I done enough for my banks?”
A WET FINGER IN THE BREEZE WON’T DO
Recent NeuGroup meetings in Europe and the US have returned to bank relationships with increased specificity. The impetus for these discussions is usually the run-up to a credit facility renewal and the desire to know the answers to these key questions: (1) which banks do we want in our facility; (2) what skill sets and capabilities do we need at least for the term of the facility; and (3) can we service the banks in the facility with enough business (wallet share)? But the larger context is the continuing trend towards fewer but closer bank relationships, built on mutual fit and commitment.
Consequently, a good relationship gauge is not only desirable but critical. Gone are ad hoc reviews and subjective approximations. Scorecards are increasingly the go-to methodology to quantify bank performance more granularly and analysis of the treasury wallet allows a closer look at the breakdown of the business you have to allocate in return.
Available off-the-shelf tools are unlikely to provide the kind of customization a relevant review requires, so most treasuries build their own in Excel; on the wallet-analysis side, for example, a recent survey of The NeuGroup’s second group for FX managers, the FXMPG2, revealed that manual/Excel tracking is used in at least half of the group, even for service fees or FX trading volumes, and is used almost exclusively for items like debt activity or investment volumes.
BUILDING A RELATIONSHIP SCORECARD
An adequate scorecard should allow treasury to translate assessments into numerical scores (unknown; below expectations; at expectations; above expectations; and preferred or “key partner bank” get scores from 0 to 4, for example) to various aspects of relevant categories such as institutional strength, product offerings, service delivery, etc. It should also allow appropriate weighting of different areas depending on the priorities of the company at any given time, like a higher emphasis on funding in cash-poor times and investments when flush, for example. Another important aspect is that the right groups in treasury assess the relevant category so as not to let the assessment rely too much on one individual’s opinion or bias.
WHAT’S IN YOUR WALLET?
With the constant pressure to portion out bank business equitably, the above referenced FXMPG2 survey showed a growing effort to flush out all available business streams between the company and its banks for a complete look at the corporate-wide wallet (see chart), and alleviate some of the tension of, for example, allocating FX trades only to revolver banks. Members of that group said while they try to allocate trades that way when they can, they also want to give trades to the banks who give the best prices or service on certain currency pairs, regardless of credit participation. Credit is the “ticket to the dance,” not a guarantee for business.
SHARE THE SCORECARD; MANAGE EXPECTATIONS
Treasurers may differ on how much of their reviews to share with their banks, but periodic meetings should be part of the relationship discipline. It can be precarious to show a bank its score relative to other banks (even with names removed), but sharing the absolute score and the scoring methodology (up to a point) may encourage bankers to try to perceive their own strengths and weaknesses proactively, for the benefit of the relationship going forward. In managing the relationship for the long term, it’s also important to get a sense for what the banks’ revenue expectations are.
Some treasurers go as far as asking for this while others take a step further and aim to provide enough wallet to sustain the relationship, too. But that may depend on how confident they are that enough banks will step up at the next credit renewal.
Wallet: Profits or Revenues?
While your profitability to your banking partners is important to the longevity of the relationship, it may be tricky to determine. NeuGroup members are more inclined to base their wallet-share analysis on revenues, which are easier to estimate and in the end fairer from the corporate point of view, especially given the opaqueness of banks’ balance sheet, risk-and-credit allocation models. Some consideration may be given to the capital requirements of some products vs. others, but there is also value in relatively predictable revenue streams of recurring FX hedging as compared to one-off windfalls like M&A transactions.