transactional banking in the new credit and liquidity climate grzegorz hansen 24112008

Transactional Banking inthe New Credit & Liquidity Climate

Grzegorz HansenTransactional Banking Department

Bank Millennium SA, Poland

Prague, 27-28 November, 2008

09-04-23 Grzegorz Hansen, Bank Millennium SA, Transactional Banking in the New Credit and Liquidity Climate 2

Millennium bcp – a Very Short Introduction

Universal bank founded in Portugal in 1985 Leader in Portugal (ca. 25% market share) Operating worldwide in 20 countries

Group employing more than 20,000 employees

Network of 1,500 branches in all countries of operations

One of major contributors to Lisbon Euronext main index


International Presence

USA

Angola

Mozambique

Macao, PRC

Portugal

France

Luxembourg

Poland

Romania

TurkeyGreeceSwitzerland

Brazil

UK

Venezuela

South Africa


More on Millennium bcp and Bank Millennium in Poland at:

www.millenniumbcp.pt

www.millenet.pl


Uncertainty regarding sources of finance (in particular currencies) – in relation to demand, incl. availability of currency swaps,

Uncertainty regarding costs of finance and its endurance,

Uncertainty regarding conditions of financing (rating, collateral),

Uncertainty regarding market rates (their adequacy/transparence as well as volatility of BIDs and OFFERs),

Uncertainty regarding currency exchange rates (double effect: balances as well as interest rates),

Uncertainty regarding market liquidity (esp. in local and international interbank markets),

Uncertainty regarding increased costs of managing credit risk, liquidity risk, currency risk, interest rates risk, exchange risk as well as political risk (e.g. transfer risk)

The Climate of Uncertainty


The Deficit of Trust (1/2)

Deficit of trust in:

markets,

countries,

counterparties,

buyers,

clients,

suppliers,

Deficit of trust in terms of scale, i.e. limits,

Deficit of trust in terms of time, i.e. tenors,


The Deficit of Trust (2/2)

Deficit of trust in stability (of market rates, of exchange rates etc), i.e. expectation of volatility of all economic and market parameters,

Deficit of trust in market’s self-regulatory (self-sustainability) mechanisms:

at micro-level (e.g. that increasing interest rates would release/produce liquidity),

at macro level (e.g. that key market makers can survive without a support of the state)


Market Environment (late 2008): Corporate Credit Availability

No global, widespread trust, Trust shrinks to close relationships only

Intra-group financing and sharing liquidity within the group will become the commonly used tools of working capital management,

Commercial credit will become at stake on scale previously unseen, Members of cash-rich groups will become visibly stronger than

corporates not having such support, Preferences in commercial credits will create stronger loyalty

relationships, Sales-backed credits based on the risk of the credit worthy party

will become more widespread forms of banking-mediated financing (and – for financing parties – of profit-making): post-due financing (provided by strong sellers – via banks - to loyal

buyers), reverse factoring (provided by buyers – via banks - to sellers)


Market Environment (late 2008): Banking Focus on Liquidity

Shortage of liquidity in interbank markets will result in banks turn towards gathering liquidity from direct deposits of current (and new) clients,

Banks’ relationships with deposit clients will become not occasional but stronger,

Keeping old deposit clients and attracting new ones will become the focus of banking competition,

Yet, in the environment where all parties (banks, clients, their suppliers) lack liquidity, deposits will not be kept with banks but „move” around in the form of transactions and short-term investments (usually O/Ns),

Therefore, corporate deposits (current accounts and short-term deposits) will try to separate themselves from transaction volumes: they will not grow in the same pace as transaction volumes kept within the same bank


Market Environment (late 2008): New Climate for Bank Deposits

Distrust of customers to banks and financial institutions (their standing) may result in „splitting” the investments among banks, in introduction of „investment limits” by clients,

A large or medium corporate bank may – on the one hand - loose some deposits but – on the other hand - may become the receiver of quite many new deposits resulting from split of deposits from other banks and their withdrawals from smaller banks,

New „hook” services offered as additional services to these new deposits may become a chance to enter into new relationships with these previous non-customers: immediate ‘https’ reports (statements + interest reports) on deposits

taken, option of immediate re-investment (via i-banking tool) into several

investment options, e-offer to open and use current account with a corporate bank (to

transform deposit relationship into c/a – i.e. full banking – relationship)


Market Environment (late 2008): The Game of Intraday Liquidity

On the one hand the pressure on quick movement of funds will be higher as liquidity will be more scarce than before: liquidity will be „provided” by „moving it”,

On the other hand the quick movement of funds will not be so easy since traditional sources of liquidity (interbank markets) do not provide enough of it on demand

Therefore, the use of RTGSs may be rationed or limited, Local payments may require „rules of priority” to be defined by

payers themselves as price differentiation between „urgent” and „queued” payments may become more visible,

The active management of customized cut-off times may be also introduced by banks,

Urgent currency payments („zero value date” or „next day”), esp. large value ones may carry related costs – clearly reflected in pricing - not only of exchange rates volatility but also of shrinking international limits and insufficient liquidity


Market Environment (late 2008): The Game of Overnight Liquidity There are markets in which local payments are already moving very

fast, allowing to send funds „there” and „return” within one day, There are other markets, with relatively old or „legacy”

payment/settlements systems and market practices/conventions where it still requires several days to move funds from one local bank to another,

The proper balance of ‘supply vs demand’ for short-term liquidity lies somewhere in the middle for quite many banking customers

These countries may recognize the new value of the old banking „float”, The liquidity-focused „float” (keeping funds at least overnight before

they are credited to account of bank’s customer or before they are sent to other banks) may be used by banks to secure their Start-Of-Day positions in the payment market (esp. when „cash input” into RTGS will be required),

‘Low fees in exchange of float’ may be the name of the game the banks would propose to some customers


Market Environment (late 2008): New Climate for Banking Credit

Shortage of credit in the interbank markets has raised the cost of credit high above the purely ‘indicative’ interbank rates (...IBOR, EURIBOR, LIBOR),

This shortage caused very high ROE expectations from lenders, Credit became the strategic, separately priced product, Yet, new margins have already reflected market volatility of rates

and shortage of credit than own risk margins of lenders; the prices reflect more the risk margins of markets (depositors, interbank lenders) than own risk margins of final lenders (distributors of credits),

Credit margins cannot be reduced to zero anymore for the sake of „other products” as happened in the past (e.g. under some notional cash pooling services),

Trade/sales-related credits (e.g. factoring or related) became much more interesting as their availability will be higher and price lower


New Focus on Deposit-Gathering Products

Larger corporates will divide their banking flows and deposits, Corporates will work hard to manage their short term funds better, Banks will need to handle more transaction flows to attract

comparative level of current account balances and short-term deposits,

Therefore, more transactional-oriented services and specific deposit-focused offer will be developed: revival of interest in direct debiting (timely, clear-cut collections of

dues), various ESCROW-type accounts, various „collection” and „deposit maintaining” accounts promoted, automatic O/N investments with dynamic interest rates application, „loyalty” fees and charges schemes for large depositors can be

expected (loyalty-billing & charging automatic module – for corporate clients)


The Shift from Overdraft towards e-Factoring (1/2)

The growing cost of credits and of reduced availability of credits to corporates push for re-definition of credit products most preferred by banks and corporates alike,

Much more demand for simple-on-line but not anymore unsecured current credit will be seen in the markets,

The option of trade/sales-backed-credit-products will become the alternative to overdraft allowing for larger limits without other collateral than expected proceed from already contracted sales,

The use of trade/sales-backed-credit-products shall also decrease the cost of financing (final lender’s own margin)


The Shift from Overdraft towards e-Factoring (2/2)

I-banking systems will turn towards stronger integration with e-enabled factoring-related (esp. small ticket) credit products, which should be again supported by: PKI-based presentment of sales documents (invoices and orders), paper-based-to-scan process presentment of sales documents where e-

invoicing is still not common, e-invoicing of various kinds (local, international, generally recognised,

recognised on the basis of special agreements), This mass-factoring-based-servicing-systems can be independent

from traditional, big ticket, manual factoring services. This sales-secured credits shall become common functionality/option of the credit systems as well as of i-banking applications


Corporate Cash Services

In economies where sales are still heavily cash-based, cash collection and processing services will gain new momentum as „cash-in-process” will have to circulate faster,

Good quality of cash transportation and processing – usually handled by outsourcers – e.g. keeping cut-off times, recording and detailed registering of counting process will become important again,

Proper and detailed e-reporting of cash payments and of cash differences should become the value cash management service in these cases where banks remain intermediaries in cash collection and cash processing services,

Banks will focus on the a/m services supporting cash collection as they will become very sensitive („jealous”, clearly expecting loyalty) to customer’s shifting of collected liquidity to other banks (as this will require loosing banks to provide intraday liquidity for such payments)


There will be more customer demand for cash pooling services, Effective cash pooling which makes possible (via physical consolidation of

participants’ cash positions) the use of intra-group financing and intra-group intraday liquidity shifting will be much more appreciated than notional cash pooling which only reduces interest costs,

Additional tools for intraday liquidity management will be highly demanded,

There will be focus on two: purely local i.e. one-currency cash pooling, international cash concentration whereby Group HO will import excess

funds to manage Group position (incl. „topping” local overdrafts or repayment of local borrowing – if costly),

Currency overnight or short-term swaps (in international cash pooling) will be avoided,

More local, non-EURozone companies will denominate or even settle their financial obligations and proceeds in EUR to avoid currency exchange instability; Therefore, more local (non-EURozone) cash pooling structures will shift to EUR as well

Cash Pooling or Automated Liquidity Management Services


We have seen several politically-driven regulatory moves in the past years,

Some of them like SEPA or Payments Services Directive in EU, Their justification and benefits will now be seen in the light of the

new challenges and will be judged against the new criteria of importance,

Will EU change its focus towards less-politically-driven regulations? Will it effectively help to revive liquidity markets, speed up moving

of funds without too high costs and promote plain-vanilla cash management while reducing their risks for payment services providers?

Will it turn towards simplifying operations and reduction of costs of sales-backed credits?

Will it push towards widespread of e-invoicing? Will it abolish barriers to intercompany financing still held in several

countries?

Should a New Shift in Regulatory Policy be Expected?


Thank you for your attention

[email protected]. +48 22 5981351fax +48 22 5385747

[email protected]

transactional banking in the new credit and liquidity climate grzegorz hansen 24112008

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