treasury hot topics seminar the traditional corporate bank relationship model is dead. what does...

Treasury Hot Topics SeminarThe traditional corporate bank relationship model is dead. What does this mean for the corporate treasurers?

19 February 2009

Agenda

Audience perspective Main reason for traditional model declineValuable bank relationship model ConclusionQ&A

PricewaterhouseCoopers

Audience perspective Share your point of view

Question n°1

How many main bank relationships do you maintain for cash management activities across the group?

1. 12. 2 to 53. 6 to 104. 11 to 205. More than 20

0%

52%

26%

13%

9%



Question n°2

Do you have a formal policy for cash and bank management?

1. Yes 2. No

86%

14%



Question n°3

Does it exist in your company a proper counterparty risk management? 1. Yes 2. No

60%

40%



Question n°4a

Do you categorize your bank relationships?

1. Yes 2. No

95%

5%



Question n°4b

If yes, do you categorize them by the following criteria? (1:Yes – 2:No)

1. Importance / tiers (core, niche, etc.)2. Sex appeal of my bank relationship manager3. Bank activities (funding, cash management, dealing,…)4. Region5. Exposure6. Funding support

43%

9%

78%

43%

13%

65%



Question n°5

By which frequency do you evaluate your corporate bank relationship(s) and measure bank(s) performance?

1. More than once a year2. Yearly3. Less than once a year4. I don’t assess my bank relationship(s)

15%

65%

10%

10%



Question n°6

Would you say that you’re evaluating your corporate bank relationship(s) via qualitative or quantitative criteria?

1. Mainly qualitative 2. Mainly quantitative 3. Both qualitative and quantitative 4. I don’t assess my bank relationship(s)

5%

14%

77%

5%



Question n°7

Which of the following elements do you formally take into account to measure your bank relationships (1:Yes – 2:No) :

1. Head office banking fees 2. Business units banking fees3. Quality of service received4. Coverage of service received 5. Flexibility6. Participation in the core financing 7. EBS coverage and support8. Customer service support9. Geographical coverage

59%

18%

77%

36%

45%

77%

23%

18%

64%



Question n°8

Have you already calculated an estimate of how much your banks gain from your relationship? Do you have an open discussion with them on that aspect?

1. Calculated and discussed with bank2. Calculated but not discussed3. Not calculated

19%

38%

43%



Thank you for your participation.

Let’s analyse your responses!

Agenda



Main reason for traditional model declinePrincipal relationship aspect scrutinized

How Corporates used to manage their relationship

Corporate Bank

1. Provide with funding

2. Offer in/out flows


Main reason for traditional model declineThe qualitative relationship

How Corporates used to evaluate their bank relationship

Does the bank support my Company in the LT funding?

Does the bank provide my Company with priority status within its organisation?

Do I have good and frequent contacts with the bank relationship manager?

Does the bank respond quickly in case of questions raised?

Does the bank have a good customer service?

Is the bank able to support my cash management structure?

Is the electronic banking system reliable and user-friendly?

Etc.


Bank activities

Main reason for traditional model decline The importance of the global vision of bank activities

Corporate Bank

Only banks were able to evaluate the relationship in terms of returns and costs

FX transactions

IR transactions

LT funding

ST funding

Insurance

Credit Card

Structure

In flows

M&A services

Out flows

Capital market

Factoring


Main reason for traditional model declineReciprocity is now the key

Agenda



Valuable bank relationship modelImportance of good bank relationship management

Dear banks,

Do you cut back lending to all firms proportionately or

do you maintain finance to firms with whom you have

exclusive or long-standing relationships?

In deteriorating credit conditions

Valuable BankRelationship

Less likely denied credit by banks

More likely to receive/renew banking facilities


Valuable bank relationship model Win-Win Model

Transparency & Communication

Quantitative & Qualitative Assessment

Win – Win Strategic Model in Bank Relationship

Monitoring of counterparty risk

Re-Negotiation with banking partners


Valuable bank relationship model Win-Win Model – 1. Transparency & Communication (1/2)

Communication is key with your banking partners

LongevityFrequency of

contactsCommitment Dedication

Personal human factors

Transparency

Be Transparent on your business situation

But also on

Your expectations Bank’s strengths and weaknesses

Bank’s performance How much you give from your business to the bank


Valuable bank relationship model Win-Win Model – 1. Transparency & Communication (2/2)

MONITORING

SELECTION

EVALUATION

REQUIREMENTS

PERFORMANCE REVIEWS

POLICY


Valuable bank relationship model Win-Win Model – 2. Quantitative & Qualitative Assessment (1/3)

Treasury OperationsTransactional costs (in/outgoing flows)

Liquidity structure cost

Capital Market / M&A operations fees

FloatElectronic Banking System

cost

ST & LT financing Reporting Investment

Credit Card Insurance Payroll



Example of

FX operations

Bank Relationship opportunity with Quantitative Assessment:

Show the Bank:- The number of your FX deals over the period- Percentage of transactions dealt with the Bank - Average spread versus other banks performance

Assess amount of business given to the Bank

Discuss potential improvement areas for negotiation purposes

Current main issue is:

How to obtain this information?

From your Treasury Management System for Group Treasury operations

Need of intra-group reporting for local operations if de-centralized FX risk management

Easiest management of foreign currency flows and hedges with workflow tool software or a payment factory tool

!



Example of Bank Performance Evaluation ScorecardBank name Bank A

Review date

19/02/09Last review

01/07/08 Start of relationship 2002

Brokerage Fees# Group

Transactions

Nominal Amount

(€k)

# Called with the bank

# Dealt with the Bank

All Bank Average Spread

Bank average spread

DifferenceBank

ranking

Bank Remuneration

(€k)

FX forward USD/EUR 1,230 12,453 689 (56%) 227 (33%) 32 bps 45 bps -13 bps # 3 10.34FX forward GBP/EUR 245 1,342 143 (58%) 35 (24%) 37 bps 52 bps -15 bps # 4 1.00IR Derivatives 23 4,500 16 (70%) 7 (44%) 17 bps 13 bps +4 bps # 1 1.78Overnight depositsOthers

TOTAL 1,498 18,295 848 (57%) 269 (32%)32.6 bps

45.1 bps-12.5 bps

# 3 13.12

Local Transactions NumberTotal

Cost (€k)Other banking activities Cost (€k)

Collections 1,456 4.57 Bank accounts 4.56Payments 2,567 12.57 Cash Management Structure (ZBA, notional pooling) 6.80

TOTAL 4,023 17.14 Capital Market Operations 2.45Others (training, credit card, insurance, etc.) 12.65

LT funding support €12m Credit lines Total 26,46LT funding support €150m Syndicated facility

Total of financing support vs. competition 15% Total Bank Remuneration (€k) 56,72Total CM operations routed through the bank 25%


Valuable bank relationship model Win-Win Model – 3. Monitoring of counterparty risk (1/4)



The principle role of the treasurer is to identify and manage financial risk.

RISKTodayCredit crunch

Sub-prime crisisFinancial meltdown Operational

Liquidity Funding Counterparty

Foreign exchange

Interest rateCommodity

But as Treasurer, do you have the authority or the information to fully identify the risks the company is running?



Elements to evaluate counterparty credit risk level

RatingsCalculation from financial history and current assets and liabilities

Typically lender/investor probability to be able to pay back a loan

Assigned by credit rating agencies (S&P, Moody's or Fitch)

CDS

To receive a protection if an underlying financial instrument defaults but no need to own the underlying security.

The price is expressed as a percentage of the notional amount

Higher CDS spread is considered more likely to default by the market

CDS can be used by investors for speculation, hedging and arbitrage

Internal ratios

Internally develop to assess counterparty level of liquidity, debt, etc.



Investment RiskMarket Replacement Risk

Current ExposurePotential Future

Exposure

Credit Risk

Settlement RiskPre-Settlement Risk

Agenda



Conclusion Key action points

1. The corporate should identify a full list of banking requirements2. Determine the approach to be adopted to relationship / transactional

banking3. Consider the criteria necessary to establish a relationship4. Analyze the strengths and weaknesses of potential relationship banks to

meet the company’s requirements5. Hold regular discussions with bankers to assess the status of the

relationship and potential developments6. Consider the global relationship implications of any new or existing

relationships7. Limit the development of new relationships to those where there is a

commercial reason for doing so8. Provide information about the company to relationship banks on a regular

basis9. Develop a formal review procedure for all relationships

Agenda


© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

Thank you!

Didier [email protected]+32 2 710 9634

Laurent Mouthuy [email protected]+32 2 710 9522

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