Published: January 01, 2012
Treasurers have placed a major focus on liquidity and risk since 2008, and this priority has remained constant ever since. At the time of the crisis, many companies took remedial action to refine and revalidate their treasury policies. These experiences are now proving very valuable in addressing the challenges and uncertainties of the current crisis.
What is becoming increasingly apparent, however, is the unprecedented speed of market change. This exacerbates the pressure on treasurers to ensure that liquidity and risk management policies and decision-making are sufficiently responsive and flexible. In addition, now that many treasurers have achieved a high degree of control over cash and risk in their primary regions, they are now ensuring that regional treasury policies are aligned, and smaller countries are integrated within the remit of regional or global treasury hubs.
During the crisis of 2008-9, many treasurers found that their treasury policies were insufficiently flexible to deal with extreme market volatility, and are now, therefore, better prepared for the current crisis. Credit risk has become a higher priority, with most treasurers sacrificing yield for greater security of cash. Difficult trading conditions, the weak economic backdrop and potential reduction in traditional funding sources are creating a greater focus on cash flow and liquidity forecasting, an area that we expect to continue developing.
While many treasurers have already achieved considerable sophistication in their risk and liquidity management, in such a volatile environment, treasurers should now be focusing on taking risk analysis to a new level. In particular, scenario analysis and contingency planning need to be prioritised to ensure that whatever the future holds, particularly in a highly challenged Eurozone, treasurers are not caught off guard. This covers all aspects of counterparty, FX, commodities, interest and operational risk.
One of the constant challenges that treasurers face is how to balance credit-driven analysis, using credit ratings and other measures, with the need to diversify their risk across a range of instruments and counterparties, and the wish to reward banks that are actively supporting them. We have seen that while there is a general desire to rationalise banking relationships, a significant number of treasurers have increased their banking relationships in the past year, particularly in Asia, suggesting that some treasurers have diversified counterparty risk, while others may have been forced to use more banks for the services they require in the wake of the crisis. With continuing liquidity constraints, and no reduction in the demand for liquidity, those in the best position to weather a difficult period will be those with stable, trusted bank relationships with a deep understanding and commitment to supporting the business dynamics and strategic vision.[[[PAGE]]]
Lloyds has established a particularly strong reputation for establishing deep customer relationships with UK companies looking to expand internationally, and foreign companies seeking to maximise their success when doing business in the UK. Increasingly, companies recognise that a bank does not need to be infrastructure-heavy to provide a high level of service, but instead to have a strong focus on information and integration that facilitate efficient internal processes.
We take a strong partnership approach and combine it with a major ongoing investment in solutions and services to help our customers get the best from their existing markets and to expand into new territories. We have particular strength in trade finance services, which have once again become very important to our customers, as well as liquidity management solutions.
Western economies are likely to experience a continued period of economic stagnation, so the fast emerging Asia economies, particularly China, that is experiencing growth of 8-10% per year, offering huge potential for trade. To facilitate this, we offer a comprehensive range of trade services, superior hedging solutions and currency services. For example, while most trade in China is still conducted in USD, this is changing fast, with RMB rapidly becoming an international trade currency.
Key to business success in new economies is not only being able to access the right products and services, but also to leverage the right advice on local cultural, fiscal and regulatory issues. Treasurers need to be mindful of local instability that may exist in new markets, in addition to normal trade risks, and ensure that the right risk mitigation techniques are in place. At Lloyds, we have worked with a third party provider to set up an Asian gateway for companies seeking to expand into Asia, offering services such as account opening and information services so that treasurers and CFOs in the UK have full access to financial data from across the business globally. Based on the success of this approach, we are also looking to extend this model to other regions.
In addition to traditional trade, cash and liquidity management solutions, a major focus for us is to support customers in their efficiency, control and cost management initiatives. For example, corporate card programmes are rapidly gaining in popularity as both procurement and financial professionals recognise the convenience, control and auditability that using cards for corporate expenditure can offer. This reflects a significant shift in behaviour, and we anticipate that at least a quarter of corporate payments will be conducted using corporate cards within the next five years. Lloyds is both responding to, and driving this trend with a sophisticated corporate card programme that offers the benefit of convenience to cardholders and a high quality of information and control for the company.
Most of the regulatory changes that are coming in are targeted at the banks rather than the corporates; however, the better treasurers understand the way that their banks’ view of liquidity, and their regulatory obligations are changing, the more constructive the dialogue can become. For example, the Individual Liquidity Adequacy Standards (ILAS) introduced in June 2010 compel banks to prioritise liquidity in the same way as capital adequacy. This has undoubtedly had an impact on bank customers, although at Lloyds, we are working hard to make that impact a positive one as far as possible. Basel III, which provides the framework for banks’ capital and liquidity adequacy, is also fast-approaching, which requires banks to maintain both short- and long-term funding buffers against a variety of risk scenarios, and will therefore also affect the way that banks deliver services to their corporate customers.[[[PAGE]]]
As a result of these changes, banks will have a different appetite for certain types of liquidity; for example, short-term working capital cash will become more attractive than it has been in the past. We are already seeing a variety of new products emerging across the liquidity spectrum that will be particularly valuable to corporates that have visibility over their future liquidity profile and can therefore structure the use of liquidity products accordingly. The new regulations should ultimately be beneficial for corporates: not only will banks continue to deliver services to enable visibility and control of cash, but in addition, corporate cash will also support banks’ asset and liability management initiatives, therefore providing mutual benefit.
While the new environment is one of uncertainty, in which corporates need to make contingency plans and stress test their liquidity and risk positions, it is also one of opportunity. Lloyds is supporting the needs of UK corporates to achieve their domestic and international aspirations, and enabling foreign companies to take advantage of the commercial opportunities that exist in the UK. Our focus is on long-term relationships, information-rich, integrated solutions, which combine to form a pragmatic approach to supporting our customers to manage their current requirements and achieve their future ambitions.
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