Published: August 01, 2010
Europe’s largest companies are reporting fewer problems securing funding for their operations and increasing demand for credit to fund growth-oriented capital expenditures. These and other positive developments suggest that big European companies are at last emerging from a period of global recession and financial market duress.
However, as these companies transition from survival mode to a more ‘normal’ posture focused on growth, they should be aware that when it comes to their relationships with banks and process of financing their businesses, the new normal might be much different than the old. Changes in bank business models and strategies and the coming reform of financial regulations will have profound impacts on all the major channels used by companies to meet their funding and treasury management needs. Some of these changes could work to companies’ advantage. For example, banks’ need for stable revenue streams is sparking interest and investment in businesses such as cash management and foreign exchange. Increased competition in these areas could result in lower costs and better service quality for corporate customers.
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On a broader basis, however, the consequences of the banking crisis and subsequent regulatory initiatives are likely to increase prices that companies pay for bank loans, even when credit begins to flow more readily to companies up and down the spectrums of size and credit rating. Increases in interest rates and fees on bank credit could in turn hasten companies’ shift from their traditional reliance on bank loans to a new and more diversified funding base incorporating much tighter management of cash flows and stepped-up levels of activity in global capital markets. For the largest and most highly rated companies, bond financing has in many instances become cheaper than bank credit — a situation that contributed to record levels of corporate bond issuance in 2009 and is likely hastening a disintermediation of banks as credit providers similar to the one that has already occurred in the United States. As a study participant from one large European company notes: “In the first half of 2009, when conditions were difficult, we asked our banks to take advantage of any market windows for bond issues.”
At this point in the cycle, efforts at regulatory reform represent a huge question mark for banks and companies alike. Rather than putting their balance sheets to work, banks are retaining capital in anticipation of changes to capital reserve requirements, rules governing their own funding mechanisms, the treatment of derivatives and a host of other critical issues. “There’s no doubt that banks’ uncertainty about these issues is acting as a drag on the recovery in corporate lending,” says Greenwich Associates consultant Riccardo Cumerlato. “But what many companies might not realize is the extent to which the outcomes of these debates will determine how they are able to finance their businesses in the future, and at what cost.”
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The results of Greenwich Associates’ 2010 European Large Corporate Banking Study reveal a series of findings suggesting that large European companies have passed the tipping point and are moving into a period of stronger business prospects and more favorable (or at least less unfavorable) credit markets:
“The credit crisis was characterized by an increased need for operational capital among European companies caused by decreasing levels of access to such funding, a reduction in demand for cap-ex funding and a growing feeling among corporate executives that their options were being constrained by their need for credit,” says Greenwich Associates consultant John Colon. “All of those trends appear to have reversed. If 2008 was a year of survival and 2009 a period of stabilization, it appears that 2010 might bring a return to growth.”
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As Greenwich Associates documented in last year’s report, relationships between large European companies and their banks proved surprisingly resilient during the darkest days of the crisis. Despite the existential challenges faced by individual banks, the competitive landscape of European corporate banking remained largely intact throughout the crisis. There were two main reasons for this stability: 1) Even when their businesses were at their worst — or perhaps especially at that time — banks had a strong incentive to maintain levels of credit and other services for particularly large clients that generate significant amounts of fee-based revenues, and 2) Even if companies were unsatisfied with their treatment from their banks, they had few options in terms of competitors offering the full range of capabilities they required. Companies, for their part, had a strong incentive to preserve relationships with banks that were providing credit. As a study participant from a large European professional services company explains: “We gave as much business as possible to our four key relationship banks and would use them for any capital issues.”
Nevertheless, companies in 2008 were targeting 39% of their banking relationships for increases or decreases in business. That share, which reflected companies’ serious concerns about both credit availability and counterparty risk associated with ailing banks, represented an abnormal level of volatility in a traditionally staid marketplace. “This year’s data shows those concerns are starting to subside,” says Greenwich Associates consultant Tobias Miarka. “Only 29% of bank relationships are expected to be subject to meaningful changes.”[[[PAGE]]]
One of the most important techniques used by companies to bridge capital shortfalls during the credit crisis was the tightening of treasury management processes to increase efficiencies and squeeze more cash from day-to-day operations. Instilling higher levels of discipline in cash management procedures has helped companies strengthen cash positions and decrease their reliance on external funding. “There is no doubt that some of the data we’re seeing on companies’ decreasing need for various types of funding is driven by their success in freeing up cash flows from operations that can then be put to other uses,” says Greenwich Associates consultant Markus Ohlig.
Rather than relenting in their drive to increase efficiencies as conditions improve, companies appear poised to intensify the effort in certain areas.
Rather than relenting in their drive to increase efficiencies as conditions improve, companies appear poised to intensify the effort in certain areas. The share of large European companies with plans to improve financial and physical supply chain management in coming months increased to 44% at the end of 2009 from 22% the prior year. “In the depths of the crisis, liquidity management became a critical tactical issue,” says Riccardo Cumerlato. “Now that some of the immediate challenges and panic of the crisis have begun to subside, companies can look to implement more permanent, strategic improvements.”
The growing importance of treasury management is starting to influence companies’ selection of their core banks. Of course, credit provision remains the driving factor in that selection process, with approximately 85% of large European companies citing credit as a primary criterion for including a bank in their list of core providers. However, the share of companies citing treasury services as an important consideration in selecting their core bank relationships increased to 56% in 2009 from 49% in 2008. The share of companies naming payments and cash management as a selection factor also increased year to year.[[[PAGE]]]
Banks in dire need of stable revenue streams are responding to increasing demand among European companies by making significant investments in their own treasury management platforms. These investments are already increasing competition in businesses such as cash management and foreign exchange — a trend that should reduce costs for companies, improve the quality of bank IT interfaces and upgrade the level of service companies receive from providers. “Any source of recurring revenues generated with low levels of risk and without balance sheet commitment is very appealing to banks at the moment, and when all is said and done with regulatory reform, the low margins of these businesses might not seem so low to the banks anymore,” says Tobias Miarka.
Companies around the world are holding record levels of cash, but the low returns European companies are generating with surplus cash investments suggest they will soon come under pressure to put the money to more productive use. Average returns on cash investments declined from 3.0% in 2008 to 1.6% in 2009. This year, companies expect their cash investments to generate returns of just 1.5%. In terms of the allocations of their cash investments, large European companies are allocating less of their total surplus cash to top-rated investments (P1/A1 and P2/A2) and more to investments with lower ratings or no rating.
The number of banks used by large European companies for cash management increased to an average 6.0 in 2009 from 5.8 in 2008. That increase was driven by companies’ serious concerns about the financial strength of individual banks and the desire to diversify as a means of minimizing counterparty risk associated with concentrating cash balances with these institutions.
Now that questions about the solvency of major banks have been resolved, companies are accelerating efforts to tighten up their cash management.
Looking ahead to 2010, only 16% of large European companies said they plan to further increase the number of banks used for cash management. Meanwhile, 35% say they plan to reduce their total number of cash management providers and one third say they plan to increase the amount of business concentrated with their lead cash management banks. “Now that questions about the solvency of major banks have been resolved, companies are accelerating efforts to tighten up their cash management,” says Riccardo Cumerlato. “Working with a single bank provides opportunities for multinational companies to utilize global cash pools and other tools that allow for a much higher level of efficiency than can be achieved working with multiple providers.” [[[PAGE]]]
Greenwich Associates conducted interviews with 661 financial officers (CFOs, finance directors and treasurers) at corporations and financial institutions throughout Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Interviews took place from September through November 2009. Subjects covered included bank credit capabilities, domestic and cross-border advisory capabilities, and equity underwriting capabilities. Debt capital markets capabilities were examined in separate interviews with corporate treasurers. Only data representing the corporations among the FT 500 are analyzed and discussed in this report.
The findings reported in this article reflect solely the views reported to Greenwich Associates by the research participants. They do not represent opinions or endorsements by Greenwich Associates or its staff. Interviewees may be asked about their use of and demand for financial products and services and about investment practices in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and review for presentation purposes in order to produce the final results.
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