Europe: A Global Perspective

By Jeroen Bakhuizen, Managing Director and Head of International Subsidiary Banking - Europe, HSBC

 
While many of the headlines on economic growth focus on emerging regions such as Asia, Europe remains at the heart of corporate strategy for the vast majority of multinationals. These include both Asian and US businesses looking for international expansion and European businesses seeking to shore up their regional presence by increasing market share and extending into new local markets. Regardless of how new or mature their activities in Europe may be, and wherever in the world they are headquartered, corporations need a banking partner with the capability and reach to meet their current and future challenges in Europe, one that understands and supports their corporate strategy at a global level.

Supporting corporate strategy

In the main, one of the treasurers’ key priorities is liquidity. The introduction of SEPA (Single Euro Payments Area) and the Payments Services Directive has made this easier in Europe than in regions with diverse market and regulatory conditions. Even so, with very high levels of market volatility, such as in GBP and EUR, many treasurers are now revisiting and revising their account structures and use of liquidity management solutions. In many cases, treasurers are taking liquidity management to the next level, reviewing the corporate balance sheet in order to reduce pressure on working capital metrics. This is leading to new conversations with customers and suppliers, and renewed attention on supply chain solutions.

For the majority of HSBC’s clients, particularly those that work with a single bank in Europe, HSBC’s web-based communications platform, HSBCNet,  is an online platform not only for cash management, but also FX and international trade, including letters of credit, guarantees and more sophisticated trade finance solutions. In a period of challenge and change, clients rely on HSBCNet to gain visibility over their cash across HSBC’s European footprint. Companies with business beyond this footprint are increasingly leveraging virtual account solutions to channel payments and collections to avoid the need to set up additional banking relationships and accounts. In other cases, clients choose to access third party bank information through HSBCNet to create a single, cohesive view over cash and risk.

The wider landscape

Treasurers also need banks to help when considering the impact of geopolitical trends and events on their business to ensure that their organisations are prepared, even though outcomes may be unpredictable. In Europe, for example, the prospect of Brexit is creating considerable uncertainty, particularly given that the 2019 exit date is approaching quickly without any clear announcements arising from the negotiations so far. 

Brexit is a key example of how FX volatility is also creating new challenges for treasurers, as markets have become highly sensitive to geopolitical events rather than economic trends. Volatility in currency pairs such as GBP/EUR and GBP/USD that may have been less problematic in the past now has a significant impact on costs and earnings. While large multinational corporations are typically well-equipped to manage FX risk, many smaller and mid-cap corporations rely on their banks for support and guidance on managing these risks.

Companies in all industries, including banks, are preparing for different scenarios. For example, treasurers will continue to require regional cash management solutions, however Brexit negotiations conclude. Banks therefore need to consider how to support this requirement in the event that current passporting arrangements cease, so many are setting up entities in mainland Europe. HSBC has always been a fully international and European bank, not simply a London office with sub-offices in other locations. As a result, the bank is already well-equipped to support clients in their regional cash, liquidity and risk management strategies across Europe. HSBC has had a major subsidiary in France since acquiring CCF in 2000, with 8,000 employees, and our second largest trading floor in Europe is based in Paris. Our German bank has over 2,800 employees across 12 corporate business centres, and we have full-service centres across 20 countries in Europe, including the major cash management hubs such as Belgium, Ireland, Netherlands and Switzerland, with reach across 33 European markets in total.

Asia into Europe

It is not only trends originating within Europe that have the potential to change the European landscape. For example, the impact of the Belt and Road Initiative (BRI) and economic stimulus programme,  first announced  by the Chinese government in 2013, should not be underestimated. China is connected  to Europe by the Silk Road Economic Belt routes, and the 21st Century Maritime Silk Road creates a network of waterways across Asia, Africa and Europe. China is expected to invest around $150bn each year in BRI programmes[1], while more than 60 countries[2] have expressed an interest in participating in BRI, and corporations across all industries will be taking advantage of the opportunities. We expect to see initial investment continuing in infrastructure and logistics, with a range of other industries following suit as companies increasingly connect their corporate strategy with BRI.

BRI is already having an impact in Europe in a variety of ways. Investment from China into Europe rose by 25% during 2016 (source: EY Attractiveness Europe 2017)[3].  The first East Wind direct freight train from China (Yiwu City in the Zhejiang province) arrived in London in January 2017, having crossed 10 countries and covered 7,400 miles. London was the 15th European city to be added to the list of direct freight services from China and the furthest away geographically. With the transport of goods becoming easier and cheaper, it gets easier for Chinese businesses to invest in Europe, with emerging opportunities in countries such as Poland. To help support these businesses, HSBC is bringing experts from China to Poland who understand the specific needs of Chinese businesses operating overseas, and can provide this support in Mandarin. Similar experts are already in place in the UK, France, Germany, Netherlands and Luxembourg to help support Chinese corporates to access and navigate European markets.

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The ongoing pursuit of global trade and investment, which is both exemplified and accelerated by BRI, will continue to strengthen connections between countries and regions and the international reach of organisations in all industries. This in turn will increase the complexity of their cash, trade and treasury management needs and the demands on their banking partners.

The surplus cash dilemma

As companies establish their business in Europe, those with surplus cash in Europe need to decide whether to repatriate funds, invest cash in the financial markets or embark on M&A, particularly as investors may be charged to hold EUR deposits. Given the limited opportunities to generate yield, affordability of financing, and the potential for high tax rates on repatriated cash, M&A has become an attractive option for corporations across all industries. 2016 saw more than 5,600 incoming FDI projects in Europe, an increase of 15% on 2015 (source: EY’s Attractiveness Survey, 2017), with investors attracted by steady growth and falling unemployment. High M&A levels create challenges for treasurers who need to integrate new entities into a coherent treasury framework to gain visibility and control over cash and risk quickly, while also integrating systems, policies and processes. 

Local and regional partnerships

Foreign investors into Europe need a banking partner who understands, and can offer insights into, regional and country nuances, whether from a market, regulatory or cultural perspective, and offer experience in supporting established and emerging trade and investment corridors. In addition, many treasurers, particularly those that maintain some local cash and treasury operations, need the assurance that there are experts ‘on the ground’ in the countries in which they operate who can provide support to their local operations. 

HSBC has fully fledged operations, including relationship management, product management and customer support across Europe to provide customers with a consistent level of support wherever their regional or global functions are located, and however centralised or decentralised their business. With corporations’ treasury management needs becoming increasingly global in nature, they need a partner bank with a comparable footprint that offers the depth of solutions, services, expertise and customer support that they require locally, regionally and globally.