|
|
EXECUTIVE SUMMARY
• Banks must help treasuries connect to the rest of their business to add value
• For emerging markets, banks must help reduce risk, and cut costs for corporates in Europe
• Banks are at risk of losing lending business to the capital markets
• New regulations to stabilize banks work against the political desire to increase lending
• If banks are to de-risk, they must become more selective about how they use their balance sheet with clients
• The GTS business is a cornerstone for accessing other bank business lines
• Corporates are focused on risk over yield; they’d rather put their money somewhere safe than chase points
Learn more about the Cash management debate participants in the January issue |
|
|
Jack Large, chair How do you align treasury strategy with business strategy?
GN, SABMiller We are one of the largest brewers in the world, with operations in over 75 countries, including some difficult territories, and a lot of receipts, including cash generation. We have grown quickly and principally by acquisition, and with the acquisition of Fosters we need to raise around $12.5 billion of debt. There is a good alignment between treasury needs – raising debt – and treasury operations.
When I joined SABMiller five years ago, we had over 30 banks at the centre and 120 banks across the organization. We have been through a long exercise to align banks with operations by considering what we need: essentially, cash collection, banking operations, raising debt – including bonds and bank debt – interest-rate management and foreign exchange. Our banking requirements are extensive but we are relatively low risk, which puts us in a fortunate position. However, in the current environment, we are acutely aware of the requirement to balance debt with ancillary services and fees.
FK, Deutsche Bank In the aftermath of the crisis, the treasury has become increasingly important and has broadened its influence. As a result, it has been given greater responsibility. Furthermore, the rest of the business now asks treasury to add value to its projects. Treasury was not always involved in cross-functional projects, but now it is asked to provide input in looking at the entire risk eco-system and take a broader view on risk or funding-related topics. For example, the treasury might add value to the distribution arm by invoicing in local currency but undertaking cross-currency payments. Likewise, on the supply side, treasury can help strategic suppliers with financing programmes through credit arbitrage. At B2C businesses, treasury might help with loyalty programmes using pre-paid cards. From a bank’s perspective, the challenge is to understand how treasury can increase connectivity with the rest of the business and add value, while helping them fulfil that role.
NG, Vodafone We’re increasingly partnering with the business. We have always set the discount rates for M&A but now, with divergent risk-free rates in parts of the eurozone, discounted cash-flow valuations change dramatically, depending on whether something is based in the UK or Italy, let alone Greece. We can help with these tricky issues.
WD, RBS Treasurers were only concerned about larger volumes and bigger tickets. Now there is interest in getting involved in smaller or local streams. Why is this happening?
GN, SABMiller We have focused on traditional treasury at the group level: raising debt, interest-rate risk management and some foreign exchange. But as the group widens, there is a greater perception of some of the complexities around treasury. The business is increasingly asking us to help to manage their cash and FX processes better in tricky markets, such as the management of FX in Africa, for example.
WD, RBS Isn’t the main driver risk?
GN, SABMiller In emerging markets, it is more around risk reduction, but in Europe, there is a significant focus on cost reduction.
FK, Deutsche Bank Most growth is in emerging markets, but those markets also present the most challenges from a treasury perspective, given that they have, traditionally, been more regulated. On the other hand, most treasury functions have to manage the increasing scope and complexity of their activities with less resources. How do you manage that and what do you expect banks to do to help?
GN, SABMiller Areas of Latin America and Africa remain difficult for us, and some banks are well equipped to help us and some are not. In Latin America, we spend in excess of $5 million in bank fees, 95% of which relates to cash collection. Getting cash out of certain rural regions is difficult and can be dangerous.
Corporate funding
Jack Large How are banks going to fund corporates over the next three to five years?
NG, Vodafone For large corporates, such as SABMiller and Vodafone, our cost of borrowing for the foreseeable is going to be materially lower than the cost of borrowing for banks. Therefore, the loan market doesn’t work from an economic perspective. Our cost of borrowing should not be a function of banks’ cost of borrowing. There are insurance companies and pension funds that will allow us to access the debt markets at significantly lower cost than bank loans.
Banks have a big problem because since a majority of large corporates that are investment grade will exclusively use the capital markets to access funding, bank loan books will be skewed to lower-quality credit, as other types of lending will not be profitable for banks. The only way banks can reduce their cost of borrowing is to merge. That is the antithesis of what the authorities want: they want banks to become smaller so they aren’t too big to fail.
Another challenge is that banks’ lending models are materially based on the provision of subsidized, revolving credit facilities, which, in turn, entitle banks to ancillary business. But I could envisage a situation whereby ancillary business is generally inadequate to compensate for the subsidized cost of revolving credit facilities. Furthermore, I can’t see why corporates couldn’t obtain revolving credit facilities directly from investors? The banking model is facing some huge challenges.
