Cash management debate: What cash management can do for corporates

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Bankers and corporate treasurers discuss what they are looking for from their relationships and the challenges of funding, the eurozone, Basle III and Sepa.


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?

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.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.

Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.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.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. 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.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. 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?


Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.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.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS Isn’t the main driver risk?



Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller
In emerging markets, it is more around risk reduction, but in Europe, there is a significant focus on cost reduction.


Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.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?

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.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?

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. 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.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML Basle III requires European banks to find an additional €1.1 trillion of tier 1 capital by 2019 and US banks to find $870 billion. At today’s balance-sheet levels, the gap is 60% of the current tier 1 capital. According to a McKinsey report, the additional cost to banks of traditional corporate lending is 60 to 100 basis points. So what should banks do? Clients are price sensitive, so you have two choices – you either absorb the cost or you don’t make the loan. If you absorb the cost and you are a universal bank, then capital is likely being used unprofitably. There is going to be a shift in how capital is used by banks and a shift in how corporates are funded.

Post-crisis ArcelorMittal, for example, was 80% bank funded and 20% market funded, but those statistics have been reversed. This shift will be replicated by most companies. There is another dimension regarding where corporates place excess cash because it will impact banks’ ability to lend.

Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.FK, Deutsche Bank There is nothing wrong with the shift towards capital markets financing for large corporates. However, should this develop into a trend, where all borrowing is achieved via the capital markets, regulators will not be happy – they also want banks to provide direct liquidity to corporates. Banks are approaching this issue with regulators, but corporates could take a more active approach in the dialogue and explain to regulators the consequences of such a shift.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone Banks aren’t being clear enough about the challenges they face, because they concentrate too much on the return on equity capital, which is the return to shareholders. They need to focus on their cost of borrowing instead.


Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays How do you think banks will bring the cost of borrowing down?



Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone
The only possible way is massive consolidation. It flies in the face of all prevailing wisdom but mergers are essential.


Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS
It is a political decision. Basle III and other initiatives to create a better-controlled, more robust banking system come at a price but that price has yet to be acknowledged.


Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone
Exactly: the quality of the debate needs to be raised. There are glaring inconsistencies with what is going on. Basle III and the desire to stimulate bank lending, for example – and the concept of splitting banks into traditional operations and casino operations – doesn’t help the case. It makes it worse.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays If you increase capital, then many banks will have to live with lower returns on equity and assets. If that happens, the cost of borrowing should go down theoretically because banks’ quality will improve.


Ancillary business

Jack Large What are the broader implications of Basle III for banks and their ability to deliver for corporates?

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone We have $10 billion of revolving credit facilities but we have never drawn on them and we don’t expect to have to do so. Our funding is from the capital markets. In India, we are reliant on banks, for example, because it is a non-recourse entity. However, this is not an issue since the Indian domestic banking system is relatively untroubled by the challenges facing banks in Europe and the US, as are Australian banks and Canadian banks. We have 31 relationship banks – the cost of refinancing those facilities will be high and we will have to potentially reduce ticket sizes. Ironically, over the same period I also expect consolidation among banks, which should mean we would naturally lose bank counterparts and, hence, revolving credit-facility capacity.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller We calculate that for our banking group, fees of $1 million equate to about $100 million of committed funding. Whether that will remain true I don’t know. Over the past five years we have reduced our relationship banks from around about 30 to 20 and we want to maintain that. We have a wide spread of business across different geographic regions and can call on a wide spectrum of banks to support us.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays Banks have to deploy available capital in a way that delivers a decent return, generates ancillary business, especially fee-based income from services that don’t require as much capital as lending, and builds up capability outside of core lending markets to ensure they can service clients in geographies where they want to expand. It is also important to get the funding model right.

Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.FK, Deutsche Bank Banks also need to work on the leverage ratio of their balance sheets. But if they are to successfully de-risk and reduce legacy exposures, they have to become more selective about how they use their balance sheet with clients – the days when they could be all things to all people are gone. Banks and their clients have to understand that.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS It is not only on the loan side that things are changing – the margins are also tight on transaction banking. Consolidation could be an answer but I don’t think that will happen. Instead, specialization will be critical. We have seen examples in the market: some banks don’t offer cash services anymore. A small bank in the Netherlands offers all kinds of banking products but is, in effect, a franchise organization. Banks will become far more efficient by using process outsourcing, working with technology partners and sharing back-office systems to reduce costs.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML It comes down to making tough decisions on capital deployment and how you balance that with ancillary business. Corporates, such as Vodafone and SABMiller, do it well but others don’t, and need to align their banking group with their needs. To do that there needs to be an open discussion about ancillary business. All banks work to capital approval processes, and look at the economic and opportunistic cost of a lending arrangement, using market instruments like CDS. Then you figure out how to generate the right return around a lending commitment. Some smaller companies make the mistake of wanting to have a ‘Who’s who’ of banks in their group, although they are not necessarily the right banks for their needs. Companies like Vodafone and SABMiller understand their requirements well and shape their banking groups to meet their requirements in capital markets, M&A, GTS, or the geographies required for GTS and capital raising.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller Initially, we didn’t have the granularity of data required, so we needed our banks to help us and disclose their fees. It probably took six months and then that information had to be reconciled with what we felt we were paying across 60 countries at the time. That helped us to identify banks that were lending significant funds but weren’t getting operational banking business and banks that earned significant operational fees but weren’t lending any money. As we raised new bank debt, we were able to realign the situation.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays Does that have an impact on your ability to select the best provider for a particular product?



Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller We shaped our banking group to meet our needs. For example, we had some Spanish banks for the Latin market, a number of European banks and large banks for capital markets, and that has served us well.


Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays It is important for banks to understand how we fit into corporates’ plans. There needs to be greater transparency about where fees will come from if you make a commitment.


Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.FK, Deutsche Bank Corporates will also have to find the right cost-to-quality mix from their banking group. For some, this will accelerate the development towards a more value-based partnership approach. Others will have to decide whether they give ancillary business to a bank that can offer long-term, high-quality support and services or a bank that merely has the balance sheet to provide funding?

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller We are price sensitive when awarding ancillary business, but this must be weighed against the quality of service we want or the flexibility we need in our treasury activities. We try to strike the middle ground. For transaction banking, most of our business is decided by requests for proposals, and quality and price are central. But in some of the markets we operate in, we are aligned with local banks because we primarily need cash collection: the global banks don’t have the necessary presence. Another way of looking at this is being very targeted in the choice of banks that will participate in your loan facilities, taking into account the breadth of product support and the operational banking they can deliver, and being clear with them where they can expect to participate in ancillary business.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone We allocate ancillary business on a meritocratic basis. We have a good handle at any moment which bank is good at what and it is wrong to assume it is consistent over time: banks’ biggest assets are people and they move quite a lot. If a team leaves for another bank, what competitive advantage do you have then? Transactional banking is different because you don’t change it on a regular basis, but you have an RFP to keep it fresh. The sizeable fees are on bond issues and interest-rate swaps, and it can be difficult to identify the fee element. How do we know what you guys earn out of that?

Giving banks flow business is an important part of the relationship. The likes of SABMiller and Vodafone are big enough that our flows are meaningful. The scale of ancillary business varies significantly: for example, our Indian tax case necessitated a court guarantee, which generated collateral provision and agency ancillary fees, which we won’t necessarily have predicted. Even if we wanted to allocate it – which we don’t – it would be impossible.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML Many banks were not particularly focused on cash management as being such an important part of the overall returns model. That has shifted significantly in the past couple of years as the value of annuity revenue has been recognized. Generally speaking, cash business is not going to move often and banks like that stickiness because it is easier to build a returns-case internally. At BAML, when we are working on these business cases, we now find it difficult to approve a lending commitment when there is no GTS commitment.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS There is going to be continuing pressure and justification for the transaction banking operating model.



Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone But the stability of earnings is the key driver.



Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays
There has been a major change in internal recognition within banks of the attraction of the transaction banking business. We make sure that where we provide lending to a customer, we equally understand how we can also become a key transaction-banking service provider to that business. There is a flipside that banks are becoming more sophisticated when it comes to monitoring return on equity, which goes back to capital consumption. If banks are disciplined and understand the relationship between providing debt and transaction and trade products, they are better positioned to generate returns.

Jack Large What strategy makes most sense: to use ancillary business as a lever or lending as a lever?

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller Without decent ancillary business being available to our banks, we would all struggle to raise funding at competitive pricing, especially in the current climate. However, through the tiering structure we have in our loan facilities, our banking group understands where this ancillary business is to be found. Moreover, through concentration of that business, centrally or regionally, we become a more valuable partner to our bank group. So using ancillary business as a lever would seem to work for us, but this must start with banks that are prepared to support us with their balance sheet, through good and bad times.

I’m sure that even Neil’s meritocratic approach consists of approaching banks that provide funding.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone It is intricately linked. You can’t get ancillary business unless you provide committed funding. There are rare circumstances when our bank group isn’t able to provide the services or at a cost we think is correct. For example, there is some cash collection business in India that is not done by our bank group. Similarly, when we were buying out a minority interest in Panafon [now Vodafone Greece] in the market, we used Alpha Bank. It is not a relationship bank but our relationship banks didn’t have the necessary market access.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays For Vodafone and SABMiller, there is a lot of ancillary business because they are in the retail space, or close to the retail space, and equally they have a banking panel that is big enough to allow them to find the best provider within that group of banks. Smaller customers without a lot of ancillary business or a huge banking panel will have to be a lot smarter.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML It is about understanding what the potential wallet is, which historically is not something that banks have done well. Rather, they have shied away from having an open discussion with a treasurer, specifying where they can add value and where they will be competing. Too often it has been more about putting the capital on the table and then hoping to find a return. Now we are getting more specific about from where that return will come. If a treasurer turns around and says: ‘We are never going to give you that business because of X, Y and Z,’ that is helpful because you can readjust your business case accordingly.

Counterparty risk

Jack Large How do banks want to be perceived in terms of counterparty risk?

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays As an organization, we pride ourselves on our risk profile. It is interesting how treasuries in various jurisdictions manage counterparty risk. There are some sophisticated methods using daily CDS spreads, matched with ratings and potential losses, whereas others – and these models are not highly correlated with the size of the company – have a static model, where they are happy to work with A-rated banks, for example. In some countries, corporates seem to be rather agnostic about underlying risk and take an attitude that in the short-term little can happen to banks, whereas in other countries there is genuine concern.

Jack Large Do you proactively make a case regarding your counterparty risk?

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays We are in the fortunate position of being perceived as relatively low risk compared with some competitors. This is reflected in spreads, but also being a non-euro bank helps in some of those discussions. Counterparty risk management has become an interesting topic to raise with corporates. Banks should be concerned about their perceived risk when corporates allocate liquidity and they need to understand the methods that corporates apply to allocated liquidity.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller We are primarily in a debt position, but there are periods where we hold cash. Our policy sets limits relative to ratings but about three years ago we also started looking at CDS spreads, which is vaguely useful, but hard to interpret. There are days when we have seen CDS spreads spike for a particular bank and you think: ‘What has changed there?’ CDS spreads are a blunt instrument. Then you are left with the decision about what to do to mitigate the deemed banking exposure – often, whether it is real or not, you get pressure from the boardroom. With regard to cash funds, we are now more stringent in terms of reviewing underlying assets and have hard and fast rules. But ratings are not active enough, and our policy is better to be safe than sorry and diversify risk.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML A lot of banks have their own liquidity funds, so we are fund managers ourselves. When we talk to our clients about how we are managing those funds, our split between capital preservation, liquidity and yield [currently 50%, 30%, 20% respectively] matches our clients’ views. In fact, yield is increasingly less important, but something has to give if there aren’t many high-rated institutions where you can place excess cash positions. Something needs to happen with all that cash.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS What we’re seeing – as in 2008 and 2009 – is that corporates are less interested in yield. Their main focus is risk, not yield, and they would rather put their cash at a central bank than at a commercial bank, even though the yield is lower.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML But their options are getting more limited because sovereigns are no longer safe. Multinational corporates are becoming a safe haven from an investment perspective.


Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone
I am 100% focused on getting my principal back – I couldn’t care less about yield. My shareholders don’t want me to take credit risk – they want mobile telephony risk. We use money-market funds extensively and we also have significant amounts in index-linked gilts on the basis that if inflation is a solution to the debt problem, index-linked gilts give us protection. In addition, because the liquidity in the banking system is fundamentally based on repo, if you cannot repo a gilt, whether it be an index-linked or a nominal gilt, the system will have had to have collapsed.

The accounting industry needs to change dramatically what it regards as cash and cash equivalent. If you have a deposit with a bank, say in Ireland or Greece, or a deposit with JPMorgan for £100 million, accounting says: ‘That is cash or cash equivalents of £100 million.’ If I have swap exposure of £100 million to a bank in Ireland or Greece and a swap exposure to JPMorgan of £100 million, the accounting profession says impair the Irish or Greek bank swap exposure to, say, £60 million and JPMorgan to £95 million. Why should accounting treat the two exposures (swap versus cash) as different? Is my cash with an Irish or Greek bank really as safe as with JPMorgan?

If you have Government bonds, even if you are invested for 10 years, you can repo them and get daily liquidity that should be a cash or cash-equivalent instrument. Cash, depending on which bank it sits with, should not necessarily count without impairment as a cash or cash-equivalent instrument.

We have our cash covered by International Swaps and Derivatives Association agreements; we also take collateral because we have a huge in-the-money portfolio and we have needed collateral support agreements with every one of our bank group – this is how seriously we take bank counterparty risk. If you have a deposit and it is not covered by Isda, what happens if you go to the bank and say: ‘Please can I have my money back, my two weeks are up?’ and they say: ‘No’? We had one default under an interest-rate derivative with Lehman Brothers when it fell over; we are going to get a superb recovery rate on that, but we are now three years into the process. The loss was negligible on a post-recovery basis but it takes three years to get your money back.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays There are some countries where corporates don’t fully understand risk and return. In Italy or Portugal, many corporates still deposit money with banks that are willing to pay up to 7%, without thinking about the possibility that they may not get their money back. There is an underlying perception that in the short term nothing will happen. The UK and Germany are sophisticated, but there are markets that are a concern.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone You shouldn’t get your money back. If you put a deposit in a bank at 5% when rates are at 0.5%, there is something wrong and you should lose your money for being stupid if it goes wrong.


Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller
As Neil and I have described, we are able to diversify away a lot of credit risk. However, the operational risk is something that we are stuck with: we get a little bit of comfort from the fact we view the operational part of banking as something that would continue even in the worst-case scenario.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone Whatever you think of Citi, it is difficult not to get some comfort from the fact that if they close, no US Army soldier gets paid and the US social security system doesn’t work. At that point, the system has gone: it is baked beans, toilet roll and shotguns that count. That is why the banking system has to survive: without it, the consequences are horrific.

Eurozone crisis

Jack Large How are you managing the crisis in the eurozone?

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS In times of crisis, more corporates are going for bank-agnostic channels to increase their ability to switch between banks. Also, where corporates might have had a bank per region, now there is interest in appointing two or more banks. We’ve had several deals where corporates have selected two banks – a number-one and a back-up. They want that comfort and flexibility in case they need to switch quickly. They will give some business to the back-up banks, so it is profitable, but they want to have everything ready, including a proprietary system, just in case something falls over.

That need for flexibility and information is not just limited to the eurozone. There is increasing demand in emerging markets for information about how to move liquidity out of specific countries should they experience rapid change.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML Historically, US banks have done a good job of supporting the European cash-management requirements of American companies because we know their head office. However, it has always been difficult for American banks to unseat a French bank for a French company, for example. Now European companies are re-evaluating which banks they use for European cash management and are taking comfort from non-European banks being their cash-management provider.

In addition, this contingency bank arrangement – with an entire mirror set-up – used to be unheard of but today is becoming increasingly common.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone The big question regarding the eurozone crisis is how to stop European citizens asking the question: ‘Why would I deposit euros with any bank that is not German?’


Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays A client asked us if we could put the money in Germany. There is a perceived security that simply comes from the fact we are able to offer a deposit in Germany – a German euro is different to an Irish euro at present.


Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone The problem is that even talking about these issues is potentially at the cost of banks in eurozone territories with problems. Careless talk costs lives and creates problems. Banks support us; we have to support them to some extent because the consequences are unthinkable. At the same time, if there is a disorderly exit of Greece, Portugal and Ireland, how do you justify to your shareholders and your board that you have significant money there?

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays A lot of what we are talking about is good housekeeping that has been in place for a number of years – as a corporate, you look at the counterparty risk and understand the risk-return ratio. Not much has changed in terms of the underlying mechanics and the responsibility of a corporate treasurer.

Single Euro Payments Area

Jack Large What does the eurozone crisis mean for Sepa?

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS We assume the euro will survive and Sepa will be an integral part of the future landscape. We are seeing demand for Sepa direct debits, and demand for credit transfers will pick up once there is a national-instrument end-date. You need a clear end-date to get things moving, both on the corporate and banking side. If the crisis continues or there is more pressure on the euro, the end-date might be later than expected.

Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.FK, Deutsche Bank I don’t have the slightest doubt that the euro will stay – although we have considerable hurdles to overcome before calm is restored – so everybody should get prepared for Sepa. Once we get a mandatory end-date, be it 2013 or 2014, people will realize the need to start their preparations quickly.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML A lot of companies see Sepa direct debits as an opportunity to re-engineer their receivables processes, which have been trickier to migrate into a centralized structure than payables because the control around the receivables process has remained local. If you have a new instrument and a new method for collections from clients, there is an opportunity to re-engineer processes.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller Fortuitously, we are just going through a rationalization of banks in Europe and have an opportunity to be much more integrated into the Sepa timetable. However, Sepa has been confusing, with a lot of deadlines and little corporate understanding of what is involved and what, if any, are the benefits.

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone We have been looking at this seriously for six months. With the amount of direct debits, given our large customer base all over Europe, it is a big issue for us. Our collections are decentralized, so we see Sepa as an opportunity to centralize. There are costs associated with change but there are going to be some savings.

However, at the same time, Sepa remains challenging. The costs can be significant. For example, we have direct-debit information within a billing system in some countries, and in a SAP (systems application programme) system in some countries. The aggravation and cost of adjusting those direct-debit fields is different depending on which system it is in. There are also technical issues, such as corporates having to be responsible for direct-debit mandate archives, to consider. A two-year time-frame for implementation would be quite a challenge for us and that is why we have to get ahead of the game.

One major problem related to Sepa is that banks’ efforts to promote it have been underwhelming. There isn’t clarity or understanding. Sepa is potentially a big opportunity – if a bank was able to explain the opportunity, companies would flock to them.

Of course, the other issue regarding Sepa is that given the euro crisis, it does seems ironic to be setting a deadline for Sepa.

Jack Large Presumably, if you put collections into a centralized environment, you still gain benefits, even if things go wrong in the eurozone?

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone It is more complex than that. In southern Europe, in particular, the big problem with cash collections is reconciliation issues. The direct debits are fine; it is when they fail there is a problem.

If you are not clearing with the local bank buy-in – we are told by our local cash managers – cooperation to sort out reconciliation issues, for example, is not necessarily as forthcoming as you might expect. There are these idiosyncrasies that you would never think of unless you were on the ground. The idea of centralizing collections is not straightforward. You also have countries, such as Portugal, that don’t do direct debits in a meaningful way. They are essentially cash societies and are not going to change quickly. So it is a business decision as well, because you can encourage your customers to migrate to direct debit by making their bills cheaper or you can make other forms of payment non-acceptable, but you cannot do it if you are going to lose customers.

“What is logical from a treasury position is not necessarily logical from a business position. The last thing you want to do in a treasury function is to be accused of damaging the business. My function is to enable the business to do whatever the business wants to do” Neil Garrod, Vodafone
What is logical from a treasury position is not necessarily logical from a business position. The last thing you want to do in a treasury function is to be accused of damaging the business. My function is to enable the business to do whatever the business wants to do.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller I want to reinforce Neil’s message that our role is to support the business. While Sepa may sound brilliant as a process, the business is more interested in customers’ credit risk and certainty of funds rather than considering fancy ideas about collecting money. Cash or cheques are king – you have that piece of paper and it is your money.

Michael Mueller (MM) is responsible for the development of the cash management business for Barclays outside the UK. He joined the bank last year from Deutsche Bank, where he held a number of senior management roles in the global transaction bank.MM, Barclays There has been a lot of investment by banks, and Sepa has now, by and large, been successfully introduced but the regulatory and political environment hasn’t evolved accordingly. One reason is that politicians are not sufficiently concerned about Sepa. Understandably, they are more concerned about the euro itself, so there is a lack of attention paid to Sepa. If the house is on fire, you don’t worry about the decorator. But the question is, when is this debate going to pick up, not among banks, but in the wider domain?

Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone I can’t see the evidence of investment by banks. I don’t think anyone is taking this seriously. Less than 2% of payments are made by Sepa. Why doesn’t the banking industry promote Sepa more? If Deutsche came out and said: ‘Our ambition is to make 50% of all our direct debits via Sepa by 2013,’ everyone would take notice. But you won’t do it because it will dent your revenue streams.

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS Banks are not doing that because not all banks are ready to embrace Sepa fully. If the local bank where a Vodafone client holds an account is not ready for Sepa, I can’t do a Sepa direct debit.


Neil Garrod (NG) was appointed director of treasury for Vodafone Group in 2008. He has been involved with the group’s M&A activity and, in particular, with establishing the valuation framework and policy the group uses. NG, Vodafone
Without regulation, how would you encourage European banks to move to Sepa?



Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS You can’t do it without regulation.



Corporate treasuries

Jack Large What are banks doing to support corporate treasuries?

Wilco Dado (WD) was appointed global head of payments and commercial cards at RBS global transaction services in June 2010, after heading RBS GTS the Netherlands. From 1992 until 1998, he worked for Rabobank International and ING. WD, RBS Our clients are clamouring for information and specifically for more insight into their relationship with us. We’ve developed a comprehensive dashboard that shows what a client is doing with RBS, so they have a good understanding of what products they use, how they work, the level of efficiency and potential for improvement. Secondly, standardization of information is essential to manage accounts and improve reconciliation processes, for example, to enable treasury operations to be re-engineered.

Frank Kutschera (FK) is head of cash management corporates for UK, Ireland and Scandinavia in Deutsche Bank’s global transaction banking division. He joined the bank in 2000, and is an alumnus of Harvard Business School.FK, Deutsche Bank One area where we help the treasury to be more efficient is by providing not only data but also intelligent information that enables educated decisions to be made at short notice. Furthermore, banks can provide best-practice market intelligence, for example, around trapped cash or regulatory changes, to meet the challenges of working in emerging markets. We are also supporting corporates’ efforts to improve cash forecasting, as well as providing a portal for investment decisions – one screen should contain all the information you need so you can make important decisions rather than waste time collecting data.

Matthew Davies (MD) is head of corporate sales, EMEA, at Bank of America Merrill Lynch. He manages the team responsible for selling the full breadth of the bank’s global treasury solutions to EMEA corporate clients, including cash management, trade finance and commercial cards.MD, BAML One company we work with is centralized and sophisticated, and manages its payment flow well, with straight-through-processing rates of 98%. But its automated reconciliation level is about 15% and they are not atypical. The cost associated with the manual reconciliation of that 85% indicates there is an opportunity for smarter solutions – and straight-through reconciliation is something companies are willing to pay for. But banks need to get better at information provision. There also needs to be more collaboration between companies and banks in how they manage information flow to improve levels of reconciliation.

Giles Newell (GN) Newell has been deputy treasurer at SABMiller for the past five years, and is leading the transformation of the treasury department into a centralized group-wide service centre. Before SABMiller, he was a treasury consultant for Price Waterhouse.GN, SABMiller That works for electronic payments or receipts but fails for cash or cheques. In Romania, for example, four-fifths of the country is serviced by one bank. We get granular data and can build our interfaces to improve reconciliation rates for receivables. For one-fifth of the country where it is a different branch collecting cash and cheques, there is a different message format. Some of the data richness is lost. STP for receivables, where there is significant cash or cheques, is much harder. Trying to lower the cost of processing receipts implies standardization in terms of messaging for receipts, and that would include cash and cheques.