Corporates turn their backs on banks

Exactly what was moved where and when is hard to clarify. Initially Siemens was reported to have denied the story. However, it subsequently changed its stance to one of no comment. The move to the ECB would have yielded the company a higher rate of interest (around 1.01%) on one-week money than it would have done at the French bank.

By depositing cash at the ECB Siemens was behaving very much like a bank – although moving deposits to the ECB, rather than borrowing from it, is unusual in many banking quarters these days. This will come as little surprise as Siemens is a bank, having applied for a banking licence last year.

The episode is noteworthy for two reasons. The first is that Siemens has this volume of deposits to move around. According to Standard & Poor’s, Siemens had $20.7 billion total cash and short-term investments on hand at year-end 2010. However, 17 global corporates had even larger balances.

Secondly, and more worryingly, the traditional practice of banks assessing the risk profile of corporates and deciding whether to lend to them is being superseded by corporates assessing the risk profile of banks and deciding whether it is safe to deposit money with them.

So are top-tier globally diversified investment-grade corporates beginning to act like banks? They are certainly having to be far more active in their treasury function. "Since 2007 corporate treasury has become a much deeper risk-management function," Richard Veffer, group treasurer at Dutch telecoms operator Koninklijke KPN, tells Euromoney. "We thought we could relax a bit a year ago but this has not proved to be the case. Counterparty risk used to be our prime focus – now it is also liquidity risk."

He is, however, cautious on suggestions that corporates should be more active in the CP markets to invest their cash, describing such developments as "inevitable – but I don’t like it. It involves so much hassle. If I want to invest in corporate CP I would rather do it through a money market fund."

He warns that the trend of corporates asking banks for more and more collateral could also turn against them, especially given the impact of long-term swaps. "If you have credit-mitigating clauses in there that require parties to post cash collateral, you could find yourselves replacing a counterparty risk with a liquidity risk," he says.

But the market might start to see well-funded corporates encroaching on areas more traditionally associated with financials. High-grade multinational corporates have already been dubbed the new sovereigns thanks to their insulation from the sovereign distress of their domiciles; many certainly have enough cash to set themselves up as banks.

So will we see more follow Siemens’ lead – reckoning that they can probably make a better fist of it than some of the existing players? Banking is surely not the most attractive new business line available to cash-rich corporates but there is no shortage of concern among them over the state of some of the banks with which they deal.

One initiative in the pipeline is the Corporate Funding Association, a project to set up a new corporate bank sponsored by 22 investment-grade-equivalent firms in Europe. The idea was first mooted in 2009 and has taken some time to get past the rating agencies. It also lost some momentum when the credit markets seemed to recover their poise at the beginning of this year. But the market paralysis generated by the intensified sovereign turmoil over the summer has re-invigorated the scheme with a new sense of urgency.

"This will be a simple, transparent bank that will function solely as a tool for corporates. It will not have the same return on equity objectives as a traditional bank and will be strongly capitalized" Philippe Roca, Corporate Funding Association

The plan is to set up a bank sponsored by corporates that will lend to those corporates – along the lines of the co-operative Genossenschaftsbanks in Germany or Rabobank in the Netherlands. But this is a multinational initiative, including companies from France, the UK, the US, Germany, Ireland, the Netherlands and Switzerland. The bank will lend exclusively in euros and will be domiciled in France under the supervision of French financial regulator the Autorité de Contrôle Prudentiel. Philippe Roca, one of the two-man project team tasked with establishing the bank, tells Euromoney.

Roca, along with Arnaud Chambriard, is a veteran of Natixis. "Twenty-two firms have sponsored this project not only to diversify their funding but also to anticipate the consequences of Basle III on banks’ regulatory capital and liquidity," says Roca. "This will be a simple, transparent bank that will function solely as a tool for corporates. It will not have the same return on equity objectives as a traditional bank and will be strongly capitalized."

The bank will offer term loans and credit facilities to corporates that are also shareholders. The CFA needs at least 100 corporate members to start operations but may launch before year-end. Roca explains that "for a contribution of €10 million to the capital of the bank, along with the rights attached, a corporate member rated triple-B plus can expect a credit facility of €140 million."

"This leverage of 14:1 for a triple-B plus borrower should be for the first four or five years roughly, as long as the bank is subject to the Basle II standardised approach," says Roca. "Once CFA is allowed to use its internal rating models, the leverage for a triple-B plus rated borrower should range between 20 and 25 instead of 14."

As companies become more nervous about some of the banks with which they deal this may become an increasingly attractive proposition. Schemes such as this demonstrate the strength of the corporate sector compared with the beleaguered bank sector, and the extent to which concerns about bank solvency might prompt firms simply to take their business elsewhere. "European companies have been taking their money out of banks since 2008," says Veffer at KPN. "The decision is very straightforward for a corporate – why would you leave money with a bank if there was any question over its solvency? The risk is completely asymmetrical. Although it may hurt the relationship if you transfer your deposits, that’s better than losing your cash."