Asiamoney: how cash management got sexy

Asiamoney, October 2010

Cash management has never been so desirable. For years a dull and forgotten part of the business of banking, today it offers everything a multinational bank needs: liquidity, tight client relationships and a modest drain on the balance sheet.

“The reality is, it is very attractive – and we have thought it attractive for a long time,” says Alan Goodyear, head of global transaction services for Asia Pacific at RBS. Cash management was a large part of the appeal of RBS buying ABN Amro in the first place, he says. “The international cash capability of ABN Amro was a key product capability RBS wanted to acquire. Now that we have completed the acquisition, cash is our favourite product, and clearly other banks have caught on to that too: it provides liquidity, it services a daily need of clients, and it provides a stable income. We view it as a core product for the earnings of the bank.”

It’s a mantra reiterated across the industry. “I would say the cash business has become even more lucrative for banks,” says Mahesh Kini, head of Asia Pacific cash management for corporate at Deutsche Bank. “It takes very little of the balance sheet and it brings in a lot of liquidity. For Deutsche this has been a core product. It brings in valuable liquidity the firm requires.” Sridhar Kanthadai, managing director and regional head of treasury and trade solutions for Asia at Citi, says the financial crisis has “reiterated the fact that this is a pretty good place to be in for financial institutions.”

For some banks, cash management is a platform to build other businesses off the back of. Standard Chartered is an example. “60% of our business is cash, trade and forex payments,” says Mike Rees, CEO of wholesale banking and group executive director at Standard Chartered. “And 60% of our revenues will always be commercial banking revenues. But on top of that, we have the opportunity to have a relationship with a strategic point of view.” These transaction-based relationships anchor other businesses for Standard Chartered such as debt capital markets and, more recently, equities.

It’s no surprise, then, to find that everyone appears to be hiring in cash management in Asia. In recent weeks HSBC has made senior cash appointments in Korea, Indonesia, China, Thailand and Vietnam, including new global payments and cash management heads in the last three of those. RBS has hired a new head of regional sales, Teoh Jin Kok, from HSBC in China (part of the reason for the merry-go-round in HSBC country heads recently) and will soon be announcing a new head of regional product too. That’s in addition to new senior appointments in Australia, China, Hong Kong and Malaysia; Goodyear is expecting RBS’s Asia GTS business to grow by 15 to 20% per year for the next few years. Citi, despite being a target for other banks looking for new hires, has increased its regional cash headcount by 8% net over the last year; Deutsche has doubled the size of its Asian cash financial institutions coverage team.

And at a local level, it’s no different. “We are in the midst of an exciting transformational change in our business,” says Tom McCabe at DBS. CEO Piyush Gupta has identified transaction banking as a key driver of future growth for the bank. “The support and investment across all aspects of our business has been incredible,” McCabe says, referring to $20 million of investment in a new corporate internet banking platform and the recruitment of 110 new customer-facing officers, among other things. “I have never seen or experienced this type of broad organizational support for the transaction banking business.”

It’s made for a competitive field for local talent. “The most notable change [since the financial crisis] is the highly competitive environment for recruiting and retaining top performers,” says McCabe.

Established banks report two forces moving in opposite directions: a knocking out of fringe players who have had other things to focus on (or been changed by acquisition); and at the same time a return of other institutions that had been seen to have stepped back or been distracted during the financial crisis. Bank of America Merrill Lynch and JP Morgan are the two most frequently cited names here, with BNY Mellon often mentioned too, though all three would no doubt insist they never went away. “I see less players but more competition,” says John Ball, regional head of cash management for financial institutions at Deutsche. “A lot of fringe banks have probably fallen out post-financial crisis, and the consolidation in the last two or three years has also had an impact. But the people who are left are the really seriously dedicated players.”

All the major banks strongly believe the financial crisis brought a flight to quality. Ball says the financial crisis “saw a move towards consolidation with service providers that had the financial strength and healthy balance sheets, and were able to provide necessary levels of liquidity.” He says that clients who joined during the financial crisis have stayed on board; “we have increased our client base significantly without compromising on client adoption processes.” Rees at Stanchart, who claims the bank “gained huge market share through the crisis and our gut feeling is we are holding on to that,” even claims the bank is rejecting new clients. “We say: we are deploying our capital for our existing clients. There are selectively clients we will take on but I have to be convinced this is not an episodic interruption where they will bank with us for six months. I need to be convinced they will bank with us for 10 or 20 years.”

But staying at the top is going to require more than headcount. “This is not a trading business where if you put five more people in front of screens you can do more deals,” says Kanthadai. “It’s about experience, expertise, technology platform, service implementation. A lot of recent entrants will find it is going to be much more complex than they hoped.”

So the big players are spending as much as ever, and in some cases more than ever before, to stay at the top. Goodyear says RBS has an investment budget of half a billion dollars to invest in platforms over the next few years. “To stay in the game you need to continue to invest, and it is something we will continue to do… The larger the platform you have, the bigger advantage you have.” Kini at Deutsche adds: “It’s a fact of life that this is a very technology driven business. The bank realises that very clearly, especially in this region.” Among other things Deutsche has invested in a global product supporting 125 currencies, integrated FX payment mechanisms and continued revamps of its direct internet banking platform. Most other banks can also point to considerable technological investments or system roll-outs.

If cash has returned to attention globally, than Asia is at the heart of it.

This stands to reason. Economies are stronger in Asia; trade is growing fastest in Asia; companies have more money to spend and trade than in the west; and it is also the region where the most companies are taking their first tentative steps cross-border. While export markets in the west are obviously depressed, the growth in intra-Asian trade has compensated. Growth in trade is even higher than booming economic numbers would suggest. “While we are busy watching economies grow at 5 to 7% or so, cross-border trade in India, for example, would be growing by high double digits,” says Goodyear. “The traditional trade patterns of exporting and importing with the west are growing, but intra-Asian trade flows are growing much faster. We have dedicated a major effort to tapping that.” He also points to increased connectivity between Australia and Asia Pacific.

Trade patterns are generally seen to benefit the multinationals over the local or regional players. “Trade flows move,” says Lisa Robins, head of treasury and securities services for China at JP Morgan. “So now we talk about trade flows intra-Asia, and maybe into certain parts of Latin America. The wonderful part of being in a global business is you have the flexibility to go where the flows are going.”

Still, regional players see it as an opportunity too: DBS under Piyush Gupta has indicated regional trade business will be at the heart of the bank’s growth strategy in coming years. “My strategy is to expand our distribution and product capabilities in parallel with the emerging Asian trade flows,” explains McCabe, who says DBS has over 120,000 customers in the transaction banking business from multinationals to SMEs and consumers. Since 2001, he says, China’s trade with Asia has grown at over 600% in a period when trade with the US and Europe grew by 3%; Asia will have nearly 800 million people with incomes that put them in the mass market bracket by 2015. “We will follow our customers as they expand in the region.”

Every bank interviewed for this feature underlines the investment they have made to understand and help with intra-Asian flows. But if the impact has been big on banks, it’s been bigger on corporate treasurers, whether at local companies – where they are learning to deal with international challenges – or at multinationals, where the role of the Asia treasurer has been elevated. “Asia is increasingly becoming a cash generating region for corporates,” says Kini. “Where 11 to 15% of an MNC might have come from Asia in the last five years, now it’s typically nearing the 20% mark. It’s become an important region for a lot of corporate treasuries, and a look of companies are looking at moving their liquidity from Asia back to head office in order to manage their central debt position.”

Goodyear agrees. “Corporate treasurers are finding they are appearing in front of the board of directors and playing a more important role in the company than they ever did before,” he says. He recalls one treasurer who said he hadn’t talked to his board in two years and is now there every week to talk about liquidity and risk. “So the understanding of credit commitment and availability is more significant than ever. But it also means they don’t have much time: treasurers have to pay more attention to the operations of their business than ever.” This provides an opportunity for providers. “Anything you can do to make life easy for them is very welcome.”

Which brings us to an important point. Anyone seeking to win new business in Asia needs to understand that the needs of treasurers have changed, both because of the financial crisis, and because Asia itself is changing. “If you look at treasurers, whether corporate or financial institutions, they are much more demanding,” says Ball, “particularly as it relates to the timing and accuracy of the information being streamed to them so they can make informed decisions. The flow of information, especially relating to consolidation in cash positions, is crucial.”

This manifests itself in several themes. “The first trend I see is financial efficiency,” says Kanthadai. During the crisis, he says, there was a marked contrast between companies that had good financial practices in place in terms of their access to liquidity, and those that did not. “When the crisis hit, market liquidity did dry up for periods of time, and access to liquidity was difficult and expensive. People who had done work in terms of being able to visualise their liquidity profile were in better shape, and had access to internal resources that were priceless.” Post-crisis, all companies want those practices in place.

Other bankers see this trend too. Goodyear notes that “Treasurers clearly need more visibility and control over their cash: who they’re selling to, when they’re paid.” And Kini speaks of “on the ground liquidity management: corporate treasurers are looking for absolute visibility for every last dollar and cent in their banking system.” Treasurers increasingly have their own KPIs on getting returns on the surplus capital in the region, and so need to be absolutely clear on what their available liquidity is – something that becomes tougher in a region where regulatory change is frequent (see box). “They want banking partners to support them in their investment options, to get their money to work hard,” says Kini. He says the push for efficiency covers both the technical side, such as reconciliation rates, and financing, with many multinationals revamping their working capital management to support suppliers and distributors as well as themselves.

Another widely observed trend is treasurers who are dealing with revenue budgets going up but expense budgets staying where they are. “Doing more with less is the new order,” Kanthdai says. “Treasurers are asking themselves how do we de-link revenue growth and cost growth? If I don’t want linear growth in costs, how do I improve operational efficiency, what can I outsource?” This is clearly good for banks. “All the efficiency tools we can bring in – payments processes, automation – are important conversations,” he says.

Another theme is risk mitigation. “Yes, growth is back on the agenda,” says Kanthadai. “But credit is not there with open wallets. Companies are finding their ability to sell is minimised because the credit environment is not robust, and even credit insurance partners are now constrained.”

And in some markets, where freedom of capital movement is limited, it’s particularly important to find the right partner. “Clients in China need three things,” says Robins. “One, they need a bank that can help them navigate the regulatory environment. Two, they need a bank that can help them with their liquidity and working capital requirements, given the fact that there are few opportunities for investing surplus liquidity and restrictions on borrowing. Three, they need not only best risk management practices, but a bank that can help them with reporting and understanding what’s going on with payments and receivables, making those things more efficient.”

It’s a big wish-list. But in an environment of great opportunity for cash management banks, the ones who listen and adapt to changing client needs will be the ones who thrive.

BOX

Regulations come and go in Asian cash and forex, but few have generated quite the excitement that recent developments in the RMB have.

Several things have happened in the last 18 months. In June 2009 the People’s Bank of China launched a pilot scheme for RMB settlement of cross-border trade involving Shanghai, four cities in Guangdong, and Hong Kong. Then in February this year new rules from the Hong Kong Monetary Authority allowed participating banks to develop RMB business provided the funds didn’t flow back into the mainland – which, among other things, opened the Hong Kong RMB bond market to any issuers eligible to issue in Hong Kong. In July, the HKMA and PBOC increased significantly the pool of permitted RMB holders and the products that can be offered to them, as well as removing restrictions on transfers between Hong Kong-based RMB deposits, creating a new offshore RMB trading market. And four weeks later, the PBOC allowed RMB offshore to come back onshore into the local interbank bond market, which allows qualified institutions to hold higher-yielding RMB-denominated assets than the deposits they were previously limited to.

In aggregate the new measures mean a dramatically expanded offshore RMB bond market, a new third market for US dollar/RMB foreign exchange, and a spur for a host of products from mutual funds to money market instruments and swaps. They also make it much more palatable for companies to accept payment in RMB.

Of all currency developments in Asia, “the RMB is the biggest story,” says Kanthadai at Citi. “As my colleagues put it: the birth of a new international currency.” And it is unarguably a big deal. Rees at Standard Chartered says the potential is “huge”, and adds: “If you believe in economic power in the east and the power of the Chinese, then ergo you believe the RMB as an offshore tradable currency is a big thing.” McCabe at DBS says the development of the RMB reminds him of the euro in the 90s, and expects and evolution of financial services products around it in the same way as developed around the European currency. “With the rapid increase of intra-Asia trade, this will be an exciting space for the next few years in terms of new product development and integrating the RMB into a regional treasury strategy. “

That said, there’s not yet all that much activity from the perspective of corporate cash and trade. “The fact of the matter is there is more written about it than actual utilization so far: many people are thinking it is best to hold on until things settle,” Kanthadai says.

That’s because there’s a lot to be done in order to be ready for whatever opportunities it brings. “If you take RMB out of the country you need to do offshore hedging, you need to make sure that your capability and oversight in-country are replicated outside, you have to have treasury centres that can handle RMB,” says Kanthadai. “There is a range of changes companies will need to go through. If you transfer risk from offshore to onshore, you must have the risk management infrastructure to support that.”

Kini at Deutsche adds: “Getting RMB out is one thing, but how do you invest it? How do you get returns on it? Are there opportunities to manage surplus cash? That’s what’s in the mind of corporate treasurers.”

Nevertheless, banks have been readying for it, often for some time. “We’ve been predicting this for about four years,” says Rees. “We have built a cash and trade system which has RMB settlement capabilities and which is now in every country in Asia. So we are relieved something’s happened, because we’d have looked a bit stupid otherwise.” At other places, there’s some caution about system development. “We have been looking carefully, preparing functionality, but from an FI perspective, we don’t see there is such a big first mover advantage because the volumes of transactions are relatively limited so far,” says Ball. That said, Deutsche can already handle RMB offshore for trade and cash in Hong Kong and Singapore and is looking at building the capability across the globe, including London and Frankfurt.

One immediate role for banks is helping clients understand what’s happening. “Clients need to be educated on where we are at now, and the opportunities that are available for them to leverage,” says Lisa Robins at JP Morgan – speaking from the ancient city of Pingyao, considered the home of China’s first ever draft bank and thus arguably the birthplace of the financial system that is evolving so dramatically today. “Even since 2008, when the PBOC announced it would have a trial period for RMB offshore settlement, we have seen tremendous changes. People are interested in how will it work, what does it mean, what are the opportunities for my company, how will I manage the risk?”

While China is the focus of the most attention, other markets are moving too, in various directions. Both Malaysia and Thailand have continued to open up their currencies, to the benefit of multinationals. “Malaysia opening up again is a positive thing: the ability to move liquidity quite easily is clearly good for treasurers,” says Kanthadai.

“MNCs are obviously looking for opportunities to get cash out as much as possible,” adds Kini. “If you are setting up a factory you want to maintain the cash there, but if you have no such plan and have cash accumulating, you want to repatriate it elsewhere. So now you can do that in Thailand and Malaysia in certain conditions, we are looking at doing that with a lot of clients.”

In the other direction, countries like India, Indonesia and Korea have talked about tightening capital controls in order to control hot money flows, though so far this has been more talk than substance. And, even as Asia appears more independent from world capital by the day, there are still threats from further afield. “The more pressing issue for many of our customers would be the risk of politically-imposed trade constraints,” says McCabe. “The political cycle in the U.S. is one of constant positioning for re-election rather than bi-partisan cooperation on economic issues, thus more trade barriers are on the agenda than catalysts to create more international trade.”