Milestones : Businesses Find Internal Solution To Liquidity Shortage



Cash in hand: Corporations are looking within for liquidity.

The banking sector is under siege, with unprecedented nationalizations globally and a widespread assumption that the extraordinary profits of the past decade may never return. However, in one not-so-small corner—transaction banking—of many giant banks titans, most notably Citi, Deutsche Bank, HSBC and J.P. Morgan, these are boom times. Demand for cash and liquidity management services in particular is rocketing as corporates struggle to find credit in the capital markets and many banks restrict balance sheet lending. Companies are rediscovering that the best source of liquidity is their own operations and are looking for solutions to liberate it.

Liquidity management is the business of moving excess cash—once bills and salaries have been paid—between various entities within a company using physical transfers, known as cash concentration, or aggregating balances in different locations using what’s known as notional pooling. Once the cash gets to the company’s headquarters or regional treasury center—often in the most tax-effective location—it can be put to work, reducing overdrafts and paying down debt or being invested to earn a return.

Cash and liquidity management remains incredibly fragmented, with most companies simply using their local bank. However, the market is consolidating rapidly, and for the top banks it offers tempting margins. In the third quarter of 2008, Citi reported revenues at its Transaction Services division up 20% on the previous year to a record $2.5 billion, reflecting double-digit revenue growth. The business made a stunning 174% return on risk capital. In the second quarter of 2008, Deutsche Bank’s Transaction Banking unit made a 109% pre-tax return on equity.

Even in a global recession, transaction volumes are unlikely to slump. And certainly demand for services that improve the speed of cash flowing through a company can only increase.

Laurence Neville