Published: October 01, 2010
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.
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.
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.
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. [[[PAGE]]]
Liquidity will still be top priority. But within this theme, improving the accuracy of cash flow forecasting, and the extension of liquidity discussion beyond cash and into other working capital financing, such as trade. Real-time reporting is a high priority and we want our clients to have access to systems with minimal costs and effortless execution. As companies continue to explore new markets and become more international, their need for banking solutions that helps them to aggregate multiple currencies in multiple markets is becoming increasingly important.
We have recently merged our cash and trade product management for corporates, and bank client segment globally, to uncover synergies which were previously untapped. Again, this is in line with our desire to deliver holistic solutions to clients irrespective of product or service type. Given the uncertain liquidity outlook and tighter banking regulatory guidelines, we think there is a lot more value to clients to consider their liquidity and working capital arrangements from both cash and trade perspective.
For example, clients looking to convert their receivables more quickly into cash and improve their days sales outstanding are using receivables services (or factoring) more widely. We have seen strong interest in this service, even from very large highly liquid clients who are using our services to drive higher sales to existing buyers.
Consistent with clients giving increased priority to real-time or near real-time information that provides visibility over who paid them and what they were paid for, we are improving the simple transaction narrative information, extending solutions such as our recently launched ‘virtual account’ solution across all markets, and providing alerts in real time. We are also investing in establishing RMB capabilities across all our markets, and getting fully prepared to service our clients when the pace of adoption picks up steam in the next few years.
The largest impact of the RMB cross-border settlement scheme has been on choice. For corporates, the scheme gives clients increased transparency of their supply chains, enables more proactive management of interest rate and foreign exchange risks, provides cost reduction for early adopters, and more efficient document and payment flows given the heavy regulations on foreign currency transactions in China.
The recent regulatory relaxations in Hong Kong enabled the CNH (or offshore Chinese yuan market in Hong Kong), as it is known, to spring to life. This has led to the development of RMB deliverable forwards offshore for the first time as well as RMB denominated investment products such as corporate bonds and structured investments as the yield curve has started to develop.
This extension of the scheme beyond trade settlement and the formation of the inter-bank market in Hong Kong has allowed non-bank financial institutions including asset management companies, insurance companies and fund houses to participate in RMB bond issuance activities and offer RMB denominated investment products to their clients.
It is early days yet, but we are seeing more and more clients begin to explore how the scheme could enable them to manage their working capital better and to participate in new investment opportunities.
The regulations on RMB have been evolving quickly with a number of announcements recently. For example, the PBOC announced on 23 June 2010 that the scheme has been extended to service trade and import transactions across 20 provinces, increased number of approved enterprises for export trade transactions, and cross-border trade with all countries globally beyond South-East Asia, Hong Kong and Macau.
For our clients, there are more opportunities to settle their China trade in RMB as the 20 provinces in China cover 95% of China’s import/service transactions and the number of approved Chinese enterprises for export trade is expected to increase substantially from 400 to many thousands in the near future. As of mid-year, about 1% of China’s monthly trade transactions were already in settled in RMB. We could already be on the accelerating part of this take-up curve.
This, coupled with the HKMA’s relaxation on 16 August 2010 enabling the development of the offshore RMB market in Hong Kong, means that our clients now have more choice in using RMB within their existing treasury policies. The scheme will extend beyond early adopters as options to hedge and manage foreign exchange and interest rate risks and achieve yield enhancement become the norm.
The steps in Hong Kong are important as they indicate the first signs of the RMB moving from a currency that can be used for commercial trade settlement to a currency that can be used as a store of value.
Allowing RMB-denominated investments will drive significant volumes as foreign clients will keep working capital funds in RMB in anticipation of future expenditure in RMB.
Our approach is to provide a complete cross-border solution including payments, collections, and FX products.
Our desire to be our clients’ core bank extends to supporting them with their overall working capital needs as they expand overseas. With our strong presence in Asia, Africa, and the Middle East, which are particular focus areas for Chinese companies, we are distinctive in being able to structure solutions that meet their emerging needs. This could be realising import or export opportunities along the Africa-China corridor using insurance-backed receivables solutions, Cross-Border Notional Aggregation, which recognises the value of their on-shore liabilities, or simply enabling them to have a global view of their accounts from their China head office or international treasury centre, which is usually in Hong Kong or Singapore.
A major need is to manage the cross-border complexities of payments and collections. For example, we can cater to clients that want to initiate electronic and cheque cross-border payments from a single account globally for 78 major and exotic currencies with amount and timing certainty, eliminating the need to maintain multiple local currency accounts globally and saving significant administrative cost and reconciliation challenges. Flexible FX pricing and choice of local payment types are supported and clients can utilise our deep local knowledge of the payments landscape to make low and high value transactions in the 70+ countries in which we operate. Standard Chartered’s globally standardised receivables matching and reconciliation engine covers multiple currencies and collections channels (paper and electronic), enabling a single consolidated view of accounts receivables and improved reconciliation accuracy.
Our approach is to provide a complete cross-border solution including payments, collections, and FX products.[[[PAGE]]]
Operating within China’s complex tax and regulatory environment, vast geography, and generous opportunities continues to be an important need for international companies working in China. SCB works with over 50 international companies and has rolled out new solutions minimising the impact of the new regulations but retaining the traditional benefits of the liquidity management solutions. Our approach is to help clients centralise their transactions and use innovative solutions such as virtual accounts to manage the complexities arising from China’s vast geography and an evolving clearing and regulatory landscape. Our delivery channels across internet and host-to-host support Chinese characters-based initiation and reporting in addition to international standards and languages. We have an important alliance with China Union Pay, the first for a foreign bank in China, which extends our collections reach to help companies expand even deeper into China. Through China Union Pay, we are able to collect funds via direct debit from local bank accounts right across mainland China or by credit card via merchant acquiring services. This is particularly useful for our clients in C2B businesses such as insurance, telecommunications and utilities.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
