Published: August 04, 2010
Credit conditions are creating a divide among large US companies in terms of the way they manage internal cash and treasury operations and select their cash management providers.
The results of the 2010 Greenwich Associates US Large Corporate Treasury Management Study reveal that companies with annual sales of less than $2.5bn added new cash management banks to their rosters from 2009 to 2010 while larger companies pared back on their lists of cash management providers. The difference between the two groups: credit availability. (See figure 1)
The smallest companies participating in the Greenwich Associates Study - those with annual sales of $500m to $999m - expanded their cash management rosters significantly last year.
The smallest companies participating in the Greenwich Associates Study — those with annual sales of $500m to $999m — expanded their cash management rosters significantly last year. Among these companies, the average number of cash management providers increased to 4.4 in 2010 from 3.5 in 2009 — a notable expansion in what has traditionally been a very stable industry. Among companies with annual sales of $1bn to $2.4bn, the average number of cash management providers increased to 4.6 from 4.2. Meanwhile, the average number of cash management providers declined to 4.7 in 2010 from 4.9 in 2009 among companies with $2.5–$5bn in annual sales and to 5.4 from 5.7 among companies with annual sales of more than $5bn.
Setting these two groups apart is the fact that, for the largest US companies, credit is more readily available. In fact, historically low rates on corporate bond issues have contributed to a glut of capital for highly rated, Fortune 500 companies. Research from Greenwich Associates’ Corporate Banking Research and Consulting Program suggests that banks eager to lend in this segment have begun competing aggressively with one another for business in the face of low demand from these companies, many of which are sitting on large cash positions and have opportunistically tapped bond markets throughout 2010.
Absent any credit-related constraints, these large US companies seem to have resumed an effort begun prior to the financial crisis to improve the efficiency of their cash and treasury management relationships. In many cases, these efforts involve building deeper relationships with a few, highly capable providers. Indeed, approximately 40% of large US companies with investment-grade ratings say they plan to concentrate more on their relationships with their lead cash management providers in the coming year.[[[PAGE]]]
The situation among smaller companies is almost entirely reversed. Companies with $2.5bn or less in annual revenues began expanding their lists of treasury and cash management providers during the market crisis for two reasons. First, the balance-sheet woes of global banks that served as core providers necessitated that companies diversify their business and cash balances as a means of managing dangerous levels of counterparty risk. Second, with the credit crunch taking hold, companies sought to use every weapon at their disposal to maximise liquidity.
In 2010, the share of companies citing banks' financial stability as a key consideration fell to 48%.
Cash management business has often been used by companies as a means of rewarding reliable lenders but the connection between treasury management and credit has grown even stronger over the past two years. One reason: Decisions about cash management have largely been taken out of the hands of assistant treasurers and other treasury staff and are now frequently being made by the corporate treasurer and even the CFO. This shift has in turn influenced the way companies select providers. Among companies with annual sales of $2.5bn or less, the size of a bank’s credit commitment now ranks as the single most important factor considered in selecting a cash management provider. (See figure 4)
As Greenwich Associates consultant Don Raftery explains, “The elevation of cash management decisions to the office of the treasurer and the C-suite shows: 1) that the recession has prompted companies to make holistic efforts at creating new efficiencies and managing risks within their cash management operations, and 2) that companies are centralising the allocation of banking business in an effort to make themselves as valuable as possible to potential lenders.” (See figure 2)
Cash management business has played an especially important role in companies’ efforts to build relationships with new bank lenders. The reason: As companies in need of credit seek out alternative providers, they are usually forced to look outside the group of large universal and corporate banks they have traditionally relied upon for loans. This process has created new opportunities for “super-regional” banks like US Bancorp, SunTrust, PNC, and Wells Fargo, as well as international banks such as BNP, BMO Capital Markets and Bank of Tokyo Mitsubishi. “These banks have all emerged as potential alternative sources of credit for large US companies, and they have all gained cash management clients over the past 24 months,” explains Greenwich Associates consultant Chris McDonnell. “But several of these banks — especially the large US regionals — share a common trait: They lack extensive capabilities in areas like debt capital markets and foreign exchange. In these cases, corporate cash management business is a valuable currency for companies to put on the table.”
Of course, any cash management business directed to potential new lenders must come from existing providers. And in the midst of a credit crunch, it is non-lenders who have paid the price. BNY Mellon and Northern Trust have traditionally been ranked among the highest quality US treasury and cash management providers in Greenwich Associates’ annual studies. Relative to the banks against which these specialist firms compete, however, they do little in the way of lending. Largely as a result, both firms have lost cash management relationships with large US companies over the past two years.
Cash management business has played an especially important role in companies' efforts to build relationships with new banks lenders.
Cash management business allocated to new providers has generally come from these and other firms outside the ranks of companies’ lead providers. “Because a company’s top cash management provider is often also one of its lead credit providers, many companies in this size category have been maintaining or even increasing the amount of cash management business allocated to these lead banks in an effort to sustain the flow of credit,” says Greenwich Associates consultant David Fox.
Reflecting this effort, even as smaller companies expand the number of providers they use for cash management, they are increasing the share of this business they are willing to allocate to a single, important provider. In 2009, companies with annual sales of $1.0–2.4bn said they were willing to allocate an average maximum of 71% of their cash management business to one provider. In 2010 that share increased to 76%. Companies with annual sales of $2.5–$5.0bn increased their maximum allocation to any one provider to 68% from 65%. “These shifts clearly demonstrate the ability for significant lenders to command the treasury business,” says Greenwich Associates consultant Pete Garrison. “Meanwhile, larger companies with ample access to credit have been able to lower the amount of business they are willing to allocate to any single provider — even as they reduce the number of banks they use for cash management overall.”
Consultants Don Raftery, Chris McDonnell, David Fox, and Pete Garrison advise on cash management services in North America.[[[PAGE]]]
The events of the past two years have had a dramatic impact on the usually staid competitive landscape of corporate cash management providers. As several of the industry leaders saw their positions weaken due to their own balance sheet troubles, banks that better weathered the market turmoil won new relationships. Underlying these major shifts was the issue of credit: Banks that were willing and able to lend were rewarded with new or additional cash and treasury management business.
These conditions have helped Wells Fargo enter the top tier of US cash management providers in terms of number of large corporate clients, along with Bank of America Merrill Lynch, J.P. Morgan and Citi. Bank of America Merrill Lynch is used as a domestic or international cash management provider by 73% of large US companies. J.P. Morgan is used by 72% of companies, Citi is used by 58% and Wells Fargo is used by 57%. In the next tier, US Bancorp is used as a cash management provider by 29% of large US companies and Bank of New York Mellon is used by 28%. These banks are the 2010 Greenwich Share Leaders in US Large Corporate Treasury Management.
However, Wells Fargo’s ability to retain cash management clients throughout the difficult market environment must also be attributed to the bank’s superior cash management capabilities. Wells Fargo joins Bank of America Merrill Lynch as the 2010 Greenwich Quality Leaders in US Large Corporate Treasury Management. Greenwich Quality Leaders are firms that have distinguished themselves by receiving quality ratings from corporate clients that exceed those awarded to competitor by a statistically significant margin. “Bank of America Merrill Lynch pulled off an impressive feat by maintaining its superior client quality ratings throughout the challenging integration period following the acquisition of Merrill Lynch,” notes Greenwich Associates’ Don Raftery.
The following tables list the 2010 Greenwich Share and Quality Leaders in US Large Corporate Treasury Management.
Consultants Don Raftery, Chris McDonnell, David Fox, and Pete Garrison advise on cash management services in North America.
Greenwich Associates provides research-based
strategy management services for financial professionals.
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Greenwich Share and Quality Leaders - 2010
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