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Corporate treasurers move centre stage: how best to manage cash and leverage it?

Citi, still one of the largest global banks in cash management despite its recent re-organisation

The Internet, new technology, trade moving East globalisation and then, the financial crisis too! Corporate treasurers have seen it all and many are still reeling from the implications. But one consequence is that they are increasingly taking centre stage in their organisations, and their views are being heard at board level after years of relatively benign neglect.

Corporations and their shareholders, as well as the owners of many privatelyheld companies, are increasingly realising that steady, reliable revenue streams, even more than profit and loss, are the key to stability and survival in the future, and will be vital when the time comes to take advantage of an international recovery, or to increase market share and geographic sweep. Electronic banking and the Internet have given, or can give, corporate and company clients more freedom from traditional banking practices. The rise of industry specialists in payments and cash management, supply chain and trade finance, as well as offerings from nonbanks, provides many more potential choices.

But most importantly, the lines between cash management and trade finance have become increasingly blurred. “The move away from cash and trade silos has been driven by the needs of clients,” comments Marilyn Spearing, head of trade finance and cash management corporates at Deutsche Bank. “The role of corporate treasurers within organisations has developed and treasury has become the centre of risk and working capital management.” This, she says, means that banks must develop integrated solutions for managing the financial supply chain and transaction banking in general which can offer corporations a variety of services, from trade risk mitigation and working capital management to systems integration and the streamlining of all related processes.

While much of the Gulf and the wider Middle East has escaped the worst effects of the financial crisis and subsequent economic recessions that have hit the US , Europe and Japan, many banks in the region have been affected by what has happened in the international credit and debt markets. As a result, new lending to their corporate clients and to wealthy individuals is slowing. Many local and regional companies face a difficult time raising funds, or renewing loans, particularly given the relative lack of developed capital markets in many parts of the GCC and MENA .

This helps to explain why treasurers and their counterparts in many Arabowned businesses are beginning to realise that liquidity cannot be taken for granted. Others, along with their counterparts in the US , Europe and Japan, who have been adversely affected by the global slowdown, may actually see liquidity as their single most important concern when it comes to managing their cash positions.

Still others are finding that in a time of global financial turmoil, foreign exchange risk is their number one worry, especially given the huge volatility that the world’s leading currencies have experienced in the past 18 months. And they are not alone: such dramatic ups and downs in currency pairs have given bankers in the region sleepless nights, too. Corporates and companies in the region are also confronting counterparty risk, putting this near the top of their new agendas. In addition to their fear of a supplier going bust, they must now be concerned about whether their bank will remain solvent.

Still other risks are becoming more prominent, too, such as interest rate risk, commodity risk and the changing regulatory environment. More and more concern is being expressed about transparency, including the ability to track payments and to communicate effectively with banking partners. Treasurers and their staff need greater financial information, on a regional and global basis, as well as better tools and skills to make accurate cash forecasts.

“Clients will want to play a far more active role in their cash management,” observes Charlie Corbett, Economics Editor for the London-based financial monthly, The Banker. Technology has allowed customers more control over their finances, but the economic downturn has awakened them to the need to monitor their risk exposure and counterparty situation ever more closely.”

So what should corporate treasurers be expecting when it comes to their banking partners, specialist or non-bank providers?

First and foremost, when it comes to payments, corporates need to unlock the liquidity in their working capital and pursue efficiencies that will help to reduce costs. “You can no longer say ‘a payment is a payment is a payment,’” maintains Rajesh Mehta, treasury and trade solutions head for Europe, the Middle East and Africa (EMEA ) at Citi, still one of the  largest global banks in cash management despite its recent re-organisation. “The economic environment requires banks to extend the payments value chain into corporates’ financial supply chains . We have to extend the efficiency of payments beyond the settlement of the transaction into the commercial relationship itself.” In addition to supplier financing, he says that “procure-to-pay” and electronic invoicing are all services that can add value to a company’s payments process.

Francesco Vanni d’Archirafi, Citi’s global head of treasury and trade solutions, also points out the importance of reducing costs in a way that benefits both the company and the bank. “If we can enable our clients to reduce days sales outstanding by 12 % and lengthen days payable by 12 % an entirely achievable expectation we can liberate $1 trillion in cash and potentially double our cash management business by enabling our clients to manage their working capital just a little bit better.” His figures are based on the fact that of Citi’s 60,000 cash management clients around the world, 3,000 are the largest multinationals or public sector organisations.

Using a number of banks is also a rapidly growing trend in cash management. “The importance of counterparty risk and the need for contingency is leading to payments being split up between providers in some cases,” confirms Spearing of Deutsche Bank. Her views are shared by Andrew Long, head of global transaction banking at HS BC. “In truth,” he says, “corporates have mostly focused on a multi-regional strategy as they are aware that no bank can really cover every region properly. The difference,” he adds, “is that they are asking if more than one bank in each region makes most sense from a risk concentration perspective.”

But aside from diversifying banking partners, corporates may also find it advantageous to look more closely at SWIFT, the global financial telecommunications network, as well as at new developments in technology. “The concept of a mono bank, with responsibility for global cash management, looks too risky for corporate treasurers in the market environment of the foreseeable future,” Stéphane de la Fouchardière, head of SWIFT development and business at BNP Paribas, told the international financial monthly, Euromoney. “The alternative is a strategy that utilises new technologies such as Swift- Net, which enables more straightforward business-to-bank connectivity, and a new approach based on flexibility, modularity and regional services.”

Spearing concurs. “The need for visibility and control does not militate against splitting up payments between different providers, given current technology,” she explains. “Ten years ago, it was essential to work with one bank if efficiency and visibility were a priority. Now the same results can be obtained even with diversification, not least through SWIFT.” Their communications network, she adds, “allows corporates to move between banks at the flick of a switch and is likely to become more attractive given current circumstances.”

Corporates and companies might also want to consider, in these relatively straightened times, the extent to which they can leverage their spending on cash management, trade finance and other services with their partner banks, observes Euromoney’s Laurence Neville. “While resilience of systems, network, service excellence and innovation remain important, the crisis has shown relationship management and the link from transaction banking to the rest of the bank to be crucial,” maintains Spearing. What that means in practice, comments Neville, “is that lending by banks is now essential to gain cash management business.”

For the largest corporates, that implies a crucial change, observes Alex Caviezel, head of treasury services, EMEA , at JP Morgan. Historically, they have seen their lending relationships separate from cash management, because they could access the capital markets for their funding needs. Except for short-term working capital, he adds, they generally focussed on getting the best deal [from a bank] for cash management. Given the ever-growing linkage between the two, corporations and companies need to consider how banks treat their clients in terms of both relationships overall and in terms of product offerings. A bank which can devote an individual or a team to the client, and which operates a co-ordinated approach has much to offer in this new climate, Neville points out.

“Those banks which can link commercial activity, such as working capital management, FX, risk management and short-dated investments are able to offer a holistic view to treasurers,” says JP Morgan’s Caviezel. “Those banks that fail to adapt to the altered cash management landscape will undoubtedly usher in a future of unhappy customers, loss of business and unwanted attention from regulators,” maintains Corbett. “Ultimately, those banks that pay sufficient attention to what their clients want will succeed.”

For corporates, companies and banks operating in the GCC, the choice of how to proceed with cash management and trade finance in the future will undoubtedly be conditional on developments in the region as a whole and in the wider world in general. But one thing seems certain: just as there will be more costs, and more difficult choices, there will also be new opportunities to make the most of revenues and cash flow, as well as better ways to ensure financial stability and the reduction of risk.

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