TCM Guide: Bank Relationship Management


Higher cost of credit and tighter credit conditions are prompting corporates to review all their banking interactions.

By Denise Bedell

It has always been a priority for corporates to manage their share of wallet effectively. But in this credit environment corporates of all sizes and shapes are forced to be even more diligent about how they manage their banking relationships and spread of ancillary business across all processes and business units.

They are looking more holistically at how they share business, the credit they receive in return and what they are paying for all banking services. It is now an essential part of the job remit of any treasurer to ensure they are getting the most out of their banking relationships while also ensuring that their banking partners are happy when credit facilities come up for renewal.

Over at least the past decade, with a highly liquid credit environment and ever-increasing competition among banks to attract corporate clients, companies lived in a world of cheap, readily available credit. They expected cheap lending, and got it, often with little need to provide much in the way of ancillary business in exchange.

“In the past, there was almost unlimited liquidity available in the banking sector globally, together with high levels of confidence and risk appetite,” notes Eric Mueller, head of country sales, Western Europe, for Deutsche Bank Global Transaction Banking. “People danced as long as the music played.”

Now there is still liquidity available, but confidence and risk appetite are still down, although some improvement has been seen over the past couple of months. “While credit and CDS pricing increased substantially at the end of last year after a long period of very low spreads, we have seen some reductions since early 2009,” says Mueller. “Nevertheless, investors still expect a much higher risk premium than in previous years.”

Repricing credit

As a result, corporate credit has become much more expensive, and many companies have seen their credit partners charge more for credit, reduce participation and in some cases remove themselves from facilities altogether. The cost of funding has completely changed as banks look to charge market rates for credit rather than making their profit through other products.


Masquelier: Bank relationship

management has completely


One banker notes: “Credit facilities had ridiculous spreads 12 months ago. Now it is getting to a more normal pricing. This is better for the bank because in the past there were trading issues, as traders were forced or pushed or incentivized to take risk to make money elsewhere because the corporate lending business was not making money. Now there is one less incentive to take on that kind of risk.”

Clearly, banks are repricing credit to charge a market rate for it, rather than seeking to recoup credit cost with ancillary business, as another banker explains: “Banks want to get a market price for credit. It is at a premium, and they want to make sure that they are pricing in both their own liquidity costs and the credit risk of the company.”

This tight and expensive credit environment has led to a sea change in the way corporates manage their bank relationships. François Masquelier, honorary chairperson of the European Association of Corporate Treasurers, explains: “Bank relationship management has completely changed. Companies are forced to revisit their relationship management policies, their approach and sometimes even their core group of banks. Some banks are completely changing, some are restructuring, some are now state-run, and some are disappearing altogether.” As such, those corporates that have the critical mass and market solidity are strengthening their criteria for bank partners. Previous criteria for analyzing a bank’s solidity and name are no longer enough. It used to be that name was sufficient solidity, but now there is more focus both on rating and on other analyses.

“Corporates are reviewing their global relationship banks and allocation of banking business,” says Deutsche Bank’s Mueller. As this review goes on, those banks that took advantage of government support programs create some fears for corporates concerned about the long-term strength and focus of their banking partners. “For those banks with government support,” he notes, “corporates are worried they will focus on local business or that they may be forced by governments to focus their involvement solely in their home country.”

Bank Perspective

However, it is not just corporates that are re-examining their bank-corporate relationships, says Mike Cummins, head of large corporate sales for J.P. Morgan. “Banks are now looking at their corporate relationships firm-wide to ensure they meet return requirements for the organization. It is a more rigorous process than we’ve seen in the past.”

“They are more closely scrutinizing who their banking partners are globally,” Cummins adds. “Clients want to understand their banking partners, how they use them, and what the cost is for each service utilized.”

Mueller says that Deutsche Bank, for one, is not deleveraging its corporate lending portfolio but using this as an opportunity to intensify relationships with clients. “The key is providing clients with intelligent global financing and transaction banking solutions that are not generally available in the market,” he says.

As bank-corporate relationship analysis changes, so do the ways that banks and corporates communicate. “We are seeing a lot more communication and transparency between banks and their corporate clients.” says Cummins. “Dialogue is a lot more open, occurs more frequently and is particularly candid.”

In some cases the number of bank relationships that companies maintain has also increased, as banks look to reduce lending participation. Says one treasurer, “Mainly for refinancing reasons, companies have had to increase the number of banks in the syndicate because they are facing liquidity issues so have to increase banks to reach the same amount of credit.”

This treasurer adds: “It is a paradox. Where we should keep reducing the number of bank relationships, some corporates are forced to increase the number of banks they deal with for credit reasons. But when it comes to ancillary business, when you slice a cake in smaller portions, the banks will be even less satisfied. Banks are always claiming that the ancillary business they receive is not sufficient to compensate [for] pricing.”

One problem, however, is that not all banks price equally on ancillary products. This is where having good data can be invaluable. By extracting information on, for example, FX transactions and the pricing of various banks, a corporate treasurer can then collate the pricing data of one particular bank versus its competitors and use that information to negotiate with that bank.

Treasury workstations, third-party systems such as trading portals and the banks’ systems themselves all provide a wealth of information that can be gathered and used in negotiations with banks. “We take any data we can out of our systems and use that to explain our share-of-wallet decisions with our banks,” says one corporate treasurer. “If they are complaining that they did not get the 10% target we set, we can show them why. That is a great help in discussions.”

As banks increase credit costs and demand more ancillary business for that credit, it is essential for corporates to be more sophisticated in their bank business management. Otherwise, the company will suffer with higher credit costs and constant demands for more business from its credit providers. Through proactive management, companies can not only absorb some of that increased cost of credit through lower ancillary business fees but also have happier banking partners, solidified lending relationships and hopefully lower lending fees once markets return to normal.

Says one treasurer: “There is no going back. The relationships are stronger than ever, more candid than ever, and both sides are being very upfront with issues or initiatives going on within their organization. This will continue, and whatever happens, these relationships are changed permanently.”