Emerging from the Crisis
An Interview with George Nast, Standard Chartered Bank
During the course of 2008 and 2009, how did the financial crisis affect your clients’ business (domestic/international)?
For our clients, not surprisingly, the biggest concern was liquidity and risk management. As funding dried up during the crisis, clients focused on conserving liquidity and worked closely with Standard Chartered, which remained ‘open for business’ and helped improve on already long-term relationships.
In terms of risk, the crisis drove home the seriousness of counterparty risk management – both bank counterparty and commercial counterparty risk. In the early days of the crisis, we benefited from a significant flight to quality as clients shifted their cash to banks that were considered more stable, and we continue to enjoy a strong base of client liquidity. Clients also became more cautious about the credit risk of their counterparties and concerned about the viability of their supply chains. There were many examples of large companies running into problems with their manufacturing operations because a supplier could not deliver parts due to a lack of financing. As such, we issued more letters of credit in 2009 than in the previous year - an interesting development given that global trade volumes decreased over the same period.
What is the impact today?
I think the lessons learnt in the last two years are still ripe in client’s minds, but there is also more optimism, particularly within our footprint in Asia, Africa, and the Middle East. Whilst there has been a reprieve in the liquidity constraints given the myriad government fiscal stimuli, there is still much to be cautious about. The record levels of corporate cash globally illustrate that. So clients are being more careful about dipping into cash reserves and are paying more attention as to how they manage their working capital, and they want a high level of transparency on every part of their working capital cycle. We also see many Western multinationals wanting to move surpluses from key growth markets of Asia to fund borrowings in Europe and the US.
Within our footprint, clients’ perspectives seem to have improved with a particular focus on taking advantage of the faster growth within these regions. The key trade corridors of Asia-Africa, Africa-Middle East and Asia-Middle East remained buoyant in 2008, with trade flows within these corridors growing at rates of up to 38% annually. We are working with these clients to build international working capital solutions to take advantage of current opportunities. For example, buyer finance has been popular in order to extend credit terms to expanding Asian manufacturers while still managing working capital.
Within our footprint, clients’ perspectives seem to have improved with a particular focus on taking advantage of the faster growth within these regions.
How have your clients’ cash management needs changed, both during the worst of the crisis and today?
Clients certainly have a greater need to streamline their internal liquidity, shorten their working capital cycle while still proving trade credit to buyers, and improve their overall transparency of cash management. But managing liquidity and risk still is paramount.
Companies have reviewed their basic working capital management approaches to ensure that liquidity is being maximised across the receivables management, collections, liquidity management, and payables. For example, they have looked at global liquidity management techniques to help unlock some of their idle or trapped cash for better utilisation by cash-strapped entities, particularly in markets with restricted capital account regimes such as China.
In terms of bank counterparty risk, whilst corporates have been striving to achieve a single global or regional cash management provider for the past decade to achieve efficiency gain, they now realise the intrinsic risk of that approach, and are either establishing contingency provider relationships, or splitting their cash management businesses among a few key providers per region.
Finally, our internal surveys of clients show an increasing demand for holistic solutions from their bankers that covers the range of needs that I have outlined. Addressing this will distinguish banks going forward.
How have you responded to these changing demands?
As mentioned, we believe that we need to be active partners to our clients in order to provide solutions to their working capital needs, not simply products and services. Our aspiration is to be the core bank to our clients, and a strong solution mindset will get us there. We have very deep experience and capabilities in key emerging markets, where liquidity is still generated by their businesses, and we have been in a good position to advise them how these can be better utilised, while complying with the complex regulatory and tax environment typically associated with these emerging regions.
Collections management is a good example of how we bring solutions to our clients’ working capital challenges.Controlling cash outflow is relatively easy, but managing cash inflow is much more problematic. With this in mind, we have extended more efficient collection services such as direct debit into additional markets and have expanded funding programmes including cheque discounting. Importantly, we also continue to expand our footprint, giving our clients access to more than 55,000 branches, primarily through partner banks, and extended network outlets to deposit funds across our core Asia, Africa and Middle Eastern markets. We find that among local clients in our markets, where we are the core transaction bank, we capture over 60% of that client’s collections.
Standard Chartered has been a net beneficiary from the change in market dynamics and client behavioural change. We emerged from the crisis relatively unscathed, and continue to have the confidence of our established base of clients. Now, corporates that had not traditionally used us for cash management are using us as their providers to balance the risk of their existing cash management provider.