treasury priorities 2015: two steps forward, one step back · · 2015-02-02corporate and public...

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Citi Treasury and Trade Solutions | Liquidity Management Services | Treasury Advisory Group

Treasury Priorities 2015: Two Steps Forward, Half Step Back

January 27, 2015

Speakers Michael Guralnick (Moderator) Managing Director, Global Sales Head, Corporate and Public Sector Sales & Global Marketing, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +44 (20) 7986 5012

Based in London, Michael has global responsibility for Citi’s Treasury and Trade Solutions (TTS) Corporate and Public Sector Sales & Global Marketing teams. His principal activity is to lead and direct TTS’ global sales strategies for the bank’s Corporate & Public Sector clients including: new sales origination, cross-sell, and ensuring client satisfaction. The Team’s mission is to develop long-term treasury and working capital management relationships with its clients across their financial and commercial ecosystems leading to a deeper and broader strategic banking partnership. In addition, he is responsible for leading the development of marketing strategy for TTS across all regions, products, and segments.

Ron Chakravarti (Speaker) Managing Director, Global Head, Treasury Advisory, Liquidity Management Services, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +1 212 816 6909 Based in New York, Ron leads a global team responsible for delivering treasury advisory and designing best practice liquidity solutions for Citi’s Treasury and Trade Solutions corporate and institutional clients. His prior experience includes positions in treasury consultancy, transaction banking product management, and corporate banking based in Asia, Europe, and the US.

Declan McGivern (Speaker) Director, Head, EMEA Treasury Advisory, Liquidity Management Services, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +353 1 622 6299

Based in Dublin, Declan is responsible for the delivery of treasury advisory to Citi’s Treasury and Trade Solutions corporate clients, specifically on treasury operations and technology integration. During his seven years with Citi, he has also been responsible for product management of Citi’s Treasury Services Group. His prior experience includes positions in treasury consultancy and as Head of Offshore Risk Management and Group Financial Controller in a major European bank.

1

Backdrop Global

Advanced Economies Emerging Markets US China

Global GDP Outlook Improving…..

…While Currencies and Interest Rates Diverging

2.70% 3.00%

3.40%

0.00%

1.00%

2.00%

3.00%

4.00%

2014 2015F 2016F

1.70%

2.40% 2.40%

0.00%

1.00%

2.00%

3.00%

2014 2015F 2016F

4.10% 3.90% 4.70%

0.00%1.00%2.00%3.00%4.00%5.00%

2014 2015F 2016F

2.40%

3.60% 3.00%

0.00%

1.00%

2.00%

3.00%

4.00%

2014 2015F 2016F

7.40%

6.90% 6.70%

6.00%

6.50%

7.00%

7.50%

2014 2015F 2016F

0.25% 0.29% 0.75%

1.63%

2.38%

3.02%

0.50%

1.16%

0.30% 0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2014 2015F 2016F 2017F 2018F 2019F

Short Term Interest Rate Outlook (Year End)

USD

EUR

JPY

1.33

1.65

108 1.11

1.48

126

1.00

1.36 137

EUR GBP JPY

2014 2015F 2016F

Projected Appreciation of USD (Year End)

Source: Global Economic Outlook and Strategy, Citi Research, January 2015

2

Drivers

Drivers

Need for Speed: Real-Time

Treasury Management

Embedding Treasury: Growth in Importance

and Scope

Continued Centralization:

Efficiency and Control

Performance Management: Increasing

Accountability

Risk Management: In the Spotlight

Key Treasury Trends1

Returns Risks Regulations

Key Drivers for Treasury in the 2015 Environment

Source: 1. Citi Treasury Diagnostics, 2014

3 Drivers

Priorities

Priorities


1. Supporting Growth

2. Managing Contingencies

3. Maximizing Technology Return on Investment

Top Priorities in 2015

Drivers

4 Priorities

Managing Growth Supporting Growth Supporting growing business momentum requires Treasuries to implement sophisticated subsidiary funding techniques, ensuring the right amount of liquidity at the right place at the right time.

2015 corporate top-line growth estimates are robust, often with expansion into new segments and geographic markets • Legacy treasury processes and financial

infrastructure may be inadequate to support growth

Transformational M&A actions are increasingly common, with firms using these to reshape businesses • Integration into (or separation from)

established financial and technology infrastructure present urgent project-orientated challenges

• Growth and acquisitions may structurally change currency profiles, sources and uses of funds, and embedded currency risks

Impacts Liquidity Risk

• Terms of trade in new geographies, products, or acquisitions may require more investment in working capital and worsen WCM metrics

Changes Working Capital Investment

• Growth may impact natural hedges previously inherent in supply chains, or give rise to new FX risks in currency and tenor

Shifts Currency Exposures

• Urgent projects added to BAU needs may stretch Treasury capacity. Continuous planning around resourcing and expertise is essential to meeting deliverables

Calls on Treasury Resources

5 Supporting Growth

Optimizing Liquidity Management Evolving commercial and market realities can quickly make legacy liquidity management practices sub-optimal. Corporates should continually reassess opportunities for extension, as well as rationalization of accounts, structures and processes to reduce carrying costs, liquidity risks, and operating risks

More Currencies

More Legal Entities

Changing Commercial

Flows

Changing Local

Regulations

Extend Cash Pools

Rationalize Account

Structures

Assess Advanced Solutions

Alignment of People, Processes and Technology in support of the evolving needs of the corporate growth agenda

6 Supporting Growth

Opportunities: China Deregulation Milestones (2012~2014) Background: To support finance center establishment, China financial reforms were further accelerated after 2012, especially

with the officially launch of China (Shanghai) Pilot Free Trade Zone (“SFTZ”). Both PBOC (China Central Bank) and SAFE (core regulator for FCY) have announced a series of new regulations since 2012.

PBOC New Regulation in 2014

1. RMB cross-border business in SFTZ • Simplification of RMB cross-border settlement • RMB cross-border borrowing • RMB cross-border pooling • RMB cross-border POBO/ROBO and netting • RMB cross-border settlement for E-commerce

2. Release deposit interest rate cap of small FCY in SFTZ (<=USD 3MM)

SAFE New Regulation in 2014

1. FCY pilot program in SFTZ • Simplification of FCY cross-border settlement • FCY cross-border pooling • FCY cross-border POBO/ROBO and netting • Capital willingness settlement

2. FCY pilot program will be promoted nationwide • FCY cross-border pooling, POBO/ROBO and netting

Jan 2012 Jul 2012

SAFE released the regulation to simplify FCY XB goods settlement

SAFE approved 1st batch of pilot clients.

Release RMB financial guarantee quota

Jan 2013 Jul 2013 Jun 2014

•Simplify RMB cross-border settlement nationwide. •Allow RMB cross-border borrowing nationwide • Release cross-border RMB company guarantees

Simplify FCY settlement under trade and service

Establishment of SFTZ

Release RMB loan interest rate floor

Jan 2014 Apr 2014 Sep 2013

Expand the range of deposit /loan floating rate

• Allow RMB cross-border business in SFTZ

Release deposit interest rate cap of small FCY (USD 3MM or less) in SFTZ

Allow FCY pilot program in SFTZ

Pilot cities expand to nationwide

Approve 3rd batch of pilot clients

Simplify RMB XB settlement, started in Shanghai

Citi is asked by SAFE to nominate 2nd batch of pilot clients.

Executed the 1st RMB cross-border lending transaction in Jan 2013

1st bank to launch multi-currency notional pooling with RMB capabilities in China in Mar 2013

1st global bank approved to set up branch in the SFTZ in Sep 2013

Executed the 1st RMB cross-border auto-lending transaction in Nov 2013

The only foreign bank to be elected as the Vice Chair of Shanghai Banking Associate SFTZ Committee in Dec 2013

Launched 1st SFTZ RMB auto cross-border pooling structure in Jan 2014

Launched 1st SFTZ RMB cross-border POBOROBO and netting deal in Feb 2014

1st batch approved by SAFE on SFTZ – FCY cross-border pooling, POBOROBO and netting Structure in May 2014

Enable automatic sweep connecting China and London. This now means Citi has live automatic RMB cross border sweeping capabilities in China, Hong Kong, Singapore, and London.

PBOC

Nov 2014

Release regulation to expand RMB Cross Border business from SFTZ to nationwide including Pooling, POBO/ROBO, & Netting.

7 Supporting Growth

Working Capital Management1

56% (2009)

76% (2014)

24% (2014)

Yes

No

Working Capital Investment Given investor focus on returns, maintaining an efficient balance sheet is imperative. Effective working capital management initiatives reduce invested capital required to fund growth

Treasury’s corporate finance expertise is vital to achieving success in effective organizational WCM. Treasury can drive tremendous value by helping create alignment and KPIs for achievement of corporate goals

Treasury

WC Metrics

Risk Expertise

Financial Targets

Knowledge Transfer

Treasury involvement has been increasing

Good Working Capital management reduces cash needed to run the company


▲20%

8 Supporting Growth

21% 33%

2009 2014

Treasury Deployment of Supplier Financing1

▲12%

Reducing Working Capital Investment

Purchase Order

Invoice Payment Issuance

Cash Outflow Sale Invoice

Cash Application

Cash Inflow

Procure to Pay Processes Treasury Order to Cash Processes

Distributing corporate-wide working capital metrics to individual business units and managing these on an ongoing basis is essential for success

DPO Centralize and automate

processes to facilitate closer terms management

Just-in-time Supplier Financing improves take-up rates and value capture

DSO Centralize and electronify

invoices to shorten presentment

Utilize options to support sales growth - from de-risking receivables portfolio to distribution financing

Consider Export LCs in higher risk markets

Establish working capital policies

Push organizational metrics down to business unit / legal entity level

Leverage centers of excellence, migrate best practices

Treasury is increasingly leveraging working capital flows/products to drive efficiencies, with treasurers reporting a 12% surge in supplier financing programs between 2009 and 2014


9 Supporting Growth

Supporting Strategic Transactions Treasury operations involvement is critical to the successful execution of a merger - to help ensure economic value is extracted from the transaction and as a catalyst for meaningful enhancement of Treasury.

Organization

Organizational Structure

Governance, Policies and Procedures

Operations

Business Continuity

Banking Infrastructure

Systems and Technology

Financial

Capital Structure

Liquidity

Transaction Scope

v v Treasury Considerations

Legal Entity Structures v Due Diligence

While strategic transaction structures vary, these interconnected and interdependent workstreams are common elements that need to be given consideration, regardless of the form.

10 Supporting Growth

Urgent Short-Term Priorities

Strategic Transactions: Prioritizing Delivery of Desired Outcomes A truly effective integration requires rationalization and optimization of business processes and supply chain management, which are important medium to long-term considerations. Consider what are near-term “Must Haves” vs medium-term “Fix Forwards”

Re-engineering Business

Processes

Evolution to Shared Services

Review of Receivables Management

Opportunities to Outsource

Addressing Supply Chain Inefficiencies

Factors to Consider in the Medium to Long-Term

• Settlement & Execution

• Organizational Structure & Project Management

• Visibility, Cash Optimization & Investments

• Systems Integration, Connectivity & Technology

• Workflow Efficiency Tools

• Risk Management, Control & Compliance

11 Supporting Growth

Managing Contingencies Treasurers need to reassess organizational structures and capabilities to ensure capacity to manage commercial and financial risks on a more integrated basis

• Tax authorities challenging transfer pricing, and permanent establishment. OECD BEPS (Base Erosion and Profit Shifting) impact MNC tax planning and supply chain constructs

• Need to assess impact on treasury structures (e.g., In House Banks, Interco Transfer Pricing) and risk management processes (e.g., Cash Pools)

• Capital control deregulation is generally favorable (e.g China / RMB) but reverses occur. Treasurers need to be activist on how global treasury and funding structures are managed and integrated

Regulations changing how banks manage balance sheets and value client business

Capital controls and tax rules evolving

FX Volatility creating uncertainty around forward earnings and market valuations2

• Specifics vary by jurisdiction, but large banks are generally being required to hold more high quality liquid assets and enhance loss absorbing capital

• Implications for bank lending impact even IG credits, e.g. on revolving credit lines. Corporates should continue to diversify funding sources and enhance liquidity risk management

• Liquidity regulations also impact banks’ appetite for deposits, with operating deposits more attractive from a regulatory perspective. Corporates should ensure short-term cash is appropriately allocated

• Conflict, Terrorism, and Political Risks on the rise

• Treasury BCP must evolve beyond standard operational recovery to playbooks to handle broader market stresses

Sources: 1. Global Political Insights, Citi Research, December 2014; 2. Driving Corporate Growth in Divergent Markets, Citi Financial Strategy & Solutions Group, December 2014. High and low volatility companies are defined based on the top and bottom quartiles of the MSCI in terms of earnings volatility relative to their industry. Excess returns measured relative to MSCI global index and companies are re-bucketed by relative volatility each year. Sales growth is industry adjusted 3-year annualized rate, and represents the median during the time period shown.

Geopolitical tensions will be a source of unwelcome surprises1

-50%

-25%

0%

25%

50%

75%

100%

2005 2007 2008 2010 2011 2012 2014

Cum

ulat

ive

Stoc

k Re

turn

(%)

High Earnings Volatility Companies

Low Earnings Volatility Companies58%

12 Managing Contingencies

Companies should consider banking relationships and arrangements in the context of their longer term business and geographic needs, building in contingency and capability to mitigate new risks

Evolving Bank Regulations

Evolving Bank Relationship Management Strategies

FROM: Bank asset appetite vs. counterparty risk considerations as key drivers of wallet allocation decisions

TO: Multiple dimensions - bank balance sheet appetite for assets and deposits;

longer-term strategy, etc

Bank Relationship Outcomes Know Your Bank (KYB) Know Your Company (KYC)

• Needs: – Funding: need for bank capital – Treasury and business:

centralization objectives; operating services needed

• Appetite: – Wallet to allocate: transactional,

deposits, etc. – Counterparty risk appetite: credit

risk, operational risk – Buying model: e.g.,

“procurement-based” vs. relationship based

Clear Communication – Company’s Needs & Appetite vs.

Bank’s Relationship Strategy & Capabilities

• Dialogue to align KYC with KYB – Understand provider

perspectives on value of business and changes

– Determine adequacy of provider returns vs. company’s banking requirements

• Leverage bargaining power across all dimensions – Reassessment of “tiering” of

banks and wallet allocation

• Relationship Strategy – Returns (Revenue, Return on Risk

Capital) – Wallet share tier objectives – Balance sheet appetite (Asset &

Deposit) – Product / Geography preferences

(including annuity vs. episodic) • Capabilities

– Product depth and reach – Advisory

• Other – Coverage model – Performance evaluation


63%

40% 37%

0%

15%

30%

45%

60%

75%

90%

FX Commodities Interest Rates

Pre-Crisis

FX Volatility – Reviewing Practices Becomes Critical

Source: 1. Factset, Bloomberg. CitiFX

FX risk is a material driver of corporate earnings volatility and Citi’s analysis suggests that companies achieving lower earnings volatility enjoy valuation premiums

FX Risk Drives Earnings Volatility1

R-squared (%) of Index Volatilities with Earnings Volatility Action Points

Treasury and finance centralization – e.g., deploying In House Banks, Intercompany Netting, Shared Service Centers – improves the ability to identify and measure risks, and leverage natural hedge opportunities. This ensures more effective implementation of risk policy.

•Consistency between business forecasts versus risk management policy

•Reflect senior management risk tolerance for both positive and negative deviation from plan

Business Alignment

•Availability and quality of business risk exposure data

•Risk management culture and framework •Aligning business plan rate setting and hedging strategy

Measurable & Realistic

•Value-at-Risk in cash flow or earnings versus the business plan

•Period-over-period volatility

Risk Measurement

•Cash flow at risk •Earnings at risk •Period-over-period volatility

Risk objectives


3. Technology: Maximize Return on Investment Given tight technology budgets and focus on ROI, treasuries need to carefully prioritize technology investments and ensure maximum impact of dollars spent

Technology Budgets

Constrained Financial

Technology

ERP

TMS Bank Connectivity

Most companies have less than optimal financial technology topographies

Reality

Maximize ROI

• Pursue further automation Leverage What You Have

• Explore low-capex/high-impact opportunities Prioritize Spending

• Continuously remediate the sub-optimal Continuous Evolution

Challenges

Visibility & Access

Process Automation

Data for Planning & Forecasting

Risk Identification

Data spread across myriad systems

Cash and risk exposures not fully captured

Manual processes creating risks

15 Maximizing Technology Return on Investment

Prioritize Spending: Big Data In Small Steps

“Big data is a set of techniques and technologies that require new forms of integration to uncover large hidden values from large datasets that are diverse, complex, and of a massive scale”. Wikipedia

Opportunities FX Exposure Identification Cash Flow Forecasting Supplier Spend Analysis Connectivity Rationalization Payment STP Cash Application STP

• Stay current with ERP and TMS technology vendors’ big data driven propositions

• Leverage Global Bank

partners – those investing in mission-specific data tools to improve client experience

While enterprise level Big Data projects continue to take shape, treasuries should take advantage of low-capex / high impact middleware and systems available from technology vendors and bank partners. Data driven opportunities can quickly generate material efficiency gains


Case Study: Big Data in Small Steps This major technology company gained material operational efficiencies, cost savings, and enhanced client experience by leveraging bank big data-driven analysis of flows across 50+ countries

Reality Many years of growth organically and by M&A Complexity of multiple internal systems, processes, and external connectivity points Resource and technology constraints to sponsor reengineering

Assessment Insights Actions Results

Connectivity Setup

Client Service Model

Inquiry Processes

Transaction Processing Formats

Automation Rates

Multiple connection points increase possibility of errors

Time zone lags between company SSCs & bank service representatives

Client staff turnover creates gaps in data continuity

Majority of service inquiries through unstructured emails

Low STP rates adds manual processes and bank fees

Process-mapped payment flows, system architecture

across 50+ countries

Re-engineered client Global Support Model

Delivered Technical Training Program

Annual intercompany

emails eliminated

Transaction inquiries reduced

STP improved

1%


Conclusions: Two Steps Forward, Half Step Back Treasurers must cope with the challenges of supporting the business in an environment of both growth and increasing complexity.





Priorities

Drivers


Citi Treasury Diagnostics

Built on Six Aspects of Treasury Operations

Liquidity Management

Working Capital Management

Risk Management

Subsidiary Funding and Repatriation

Policy and Governance

Systems and Technology

Identify Where You Stand Relative to Peers—Learn What Counts as Best in Class

Benchmarks Benchmarks Relative Performance Detail

Winner, Celent Model Bank

Award

Silver Winner, Solution of the Year, Treasury and Risk

Alexander Hamilton Awards Winner, Innovative Product

Performance Risk Management +/- Policy &Governance

Liquidity

Working Capital

Sub Funding &Repatriation

Risk Management

Systems &Technology

3.0

2.9

3.0

2.9

3.0

2.9

3.0

2.9

My Relative Performance

Process Area Against Peer Group Against Universe

Liquidity/funding risk Worse Worse

Interest rate risk Worse Worse

Foreign Exchange (Transactional) Better Better

Global benchmarking platform providing treasury insights based on data from hundreds of multinationals.


http://www.alexanderhamiltonawards.com/

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treasury priorities 2015: two steps forward, one step back · · 2015-02-02corporate and public...

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