TCM Guide : Proving Ground



How banks treat their customers through the current hard times will define their relationships for years to come.



Moinian warns corporates to be cautious: “Banks in trouble are offering extremely good rates”.

A wave of anxiety is sweeping through the corporate world as businesses re-evaluate their bank relationships. Those companies are seeking reassurance not only that their banking partners will still be around next year but also that they are willing and able to provide liquidity and that they have the technological capability to help their clients improve process efficiency.

In reviewing their banking partners, corporates are looking at a number of things. The first is whether their banks are continuing to participate in their liquidity facilities. Second, and just as important, is the soundness of the banks themselves and whether the company should continue to bank with that institution. Finally, they are looking at the solutions and services that their bank is providing, whether it is capable of providing the best possible concentration structures and cash solutions to maximize the efficiency of their capital use.

Shahrokh Moinian, head of corporate cash management sales for Western Europe at Deutsche Bank, says that the consequences of the credit crunch are twofold from a treasury perspective. First, there are fewer mergers and acquisitions happening—especially large deals—because it is difficult to finance them, he says. “Second, treasurers are dealing with a growing need in short-term working capital financing,” he adds. As a result, companies are taking a good hard look at those banks with whom they interact. For those with the financial clout, the goal is to ensure they are partnering with the best banks in the market for their needs—both now and down the road. For those without the financial wherewithal to be choosy in the current environment, they are simply trying to ensure that their banks will continue to provide credit—both by participating in revolving credit facility renewals and by providing access to liquidity for daily business needs.

Counterparty Risk
Corporates are also evaluating their banks from a counterparty risk and credit point of view. “In terms of counterparty risk,” explains Moinian, “corporates are asking whether the bank is creditworthy enough for clients to leave their excess in. For centralizing cash, should they leave it with Bank X, or are they concerned that this bank may not be there tomorrow?” Companies are no longer happy to simply look at the rating of a bank. They are also concerned about how the bank is capitalized. They want to understand the long-term strategy of the bank and bank management. “Also they are looking at whether the bank is in a growth and expansion mode rather than internal-looking mode because of their own problems,” adds Moinian.

For those corporates desperate for liquidity, it is important to appropriately manage the good rates/bad bank dilemma. “One difficulty is that banks in trouble are offering extremely good rates to corporates—but they may be desperately looking for liquidity, so this may not be the best choice from a strength point of view,” Moinian says.

Another big change in how companies deal with their banks is in how they handle “wallet share.” Many, if not most, corporates are being more balanced and careful in how they hand out cash management and other peripheral business in relation to who is providing them with credit.

After a number of years with abundant credit, corporates had the upper hand. It was easy to cherry-pick, to take cheap funding when it was available without managing the share of wallet and giving back with other business. Now they are forced to be a bit more careful in order to ensure that extra business provision is associated with liquidity provision. “In the mid-cap segment, there has always been a very strong link between financing and cash management,” explains Erik Seifert, head of cash management, Sweden, at SEB, “whereas the largest corporates to some extent have been able to decouple the selection of cash management providers from that of financing.”

“However, today, the tight credit market is linking the two even for larger corporates,” Seifert notes. “A consequence of this is that many corporates are less prone to change cash management banks even if they are unhappy with the service, as they are very reluctant to go out to the market to refinance.”

Looking Inside For Liquidity
But sticking with current banks—although appealing—may not always be the best way to ride out the credit crunch. In addition to ensuring rock-solid access to liquidity, corporates are also looking to use internal resources more efficiently to maximize working capital management; no cash is cheaper than the cash you already have. This means re-evaluating internal processes and external links and looking for greater efficiency throughout the working-capital chain.

The ideal way to achieve this would be to have just a single banking partner with the high-end technology and the balance sheet to meet all needs. But a single bank is unlikely to be able to satisfy all the liquidity needs of a corporate that used to be covered by a group of banks. This brings the dilemma between efficiency, with a single-bank solution, versus liquidity, with a multi-bank solution. Of course, if the banking group is too large, banks are unlikely to be unhappy with the collateral business they are given, hence the balancing act between number of banks, required credit and share of wallet.

“Many corporates will only consider liquidity,” says one banker, “but I would encourage them to look at both aspects of a relationship—the technical and the credit sides. Taking a long-term view and creating gains in efficiency can lead to just as much cost savings as getting credit, and it can reduce your need for credit. Internal funding is always the best way to go.”

With all of the recent upheaval in the banking market, corporates are dealing with the possibility that their banking partners may refuse to participate in their liquidity facilities or, worse yet, that they may disappear tomorrow. Those banks in financial difficulty are shedding some of their corporate clients, along with staff, in order to de-stress themselves. And other banks in the market are picking up the pieces.

“There should be no wavering when it comes to how banks treat their customers,” says Jacob Jegher, an analyst at consultancy Celent. “Banks say they are prioritizing their approach to customers and the crisis shouldn’t change anything. Those banks that have succeeded will have a better chance of weathering the storm because their customers will appreciate it once the storm is over. Banks that do not follow this approach will have to work harder on customer retention after the crisis is over.”

Corporates re-evaluating their bank relationships may find this crisis will become a proving ground for the strength and loyalty of their banking partners. Those banks that show themselves worthy should reap the rewards once the crisis is over.


Denise Bedell