Published: July 01, 2014
Transforming Challenges into Opportunities
PwC’s Asia Corporate Treasury Survey examines corporate treasury functions in Asia and shares insights on, among other issues, the structure of these treasuries, their key challenges, their risk management approaches, their relationships with their bankers, and their approaches to cash and liquidity management. The survey is based on information gathered from 117 organisations across seven countries in Asia, covering a broad range of industries, including commodities, manufacturing and consumer products. This article contains highlights of the survey. A complete version of the survey report is available directly from pwc.com/corporatetreasury.
The global financial crisis and the subsequent economic recession have brought about several changes to corporate treasury functions in Asia in recent years. Dealing with the crisis, including the impact on funding, liquidity management, commodity price volatility and financial counterparty risk has provided the most rigorous test for treasury teams. Yet it has also brought the importance of treasury to the forefront of the boardroom agenda and created a once-in-a-career opportunity to raise the status and influence of the treasury function within the business. Businesses operating in Asia also face challenges unique to the region – there is no single regulator, there is no single currency, the banking landscape is very diverse, and there are many restrictions relating to the multiple emerging currencies. PwC’s inaugural Asia Corporate Treasury Survey aims to understand how treasury teams in the region cope with the challenges. Are they adding value to their businesses? What are the main concerns of treasurers? What is the future of treasury going to be like?
Our survey shows close to 30% of treasuries operate in geographically dispersed businesses, covering six or more countries; another 31% oversee between two to five countries. They are therefore likely to be dealing with complex cross-border liquidity, currency and counterparty issues. However, more than half of the respondents have five or fewer staff in their group treasury function.
Demand for appropriately skilled personnel outstrips the supply available.
Fifty-four per cent of respondents indicated dissatisfaction with current talent management in their organisations. This is compounded by rapid growth and cross-border expansion regionally. The demand for appropriately skilled personnel outstrips the supply available as a result; this is especially so in Asian countries with less sophisticated finance sectors and in companies with smaller corporate treasury teams. As risks become more complex, there is also a growing need for greater skill specialisation.
Cash and liquidity management and financial risk management were identified as the two most important treasury activities (Figure 1). This came as no surprise, as we witnessed a period of significant foreign exchange, interest rate and commodity price volatility in recent years. Notably, the market saw emerging currencies like the Indian rupee and the Indonesian rupiah tumbling in value in 2013. The uncertainty over the tapering of quantitative easing by the US Federal Reserve is also likely to have a considerable impact on interest rates and liquidity.
The responses seem to imply the respondents may aspire to be value-added treasury centres rather than actually performing as one.
Sixty-two per cent of respondents perceived themselves to be ‘value-added’ treasuries, where treasury works actively with the business to achieve its strategic goals. However, our survey found that many treasuries in Asia are still using traditional methods for managing risks. Many have yet to implement proactive management of cash and liquidity or adopt treasury technology to drive process efficiencies and enhance timely and useful information to support better decision-making.
The responses seem to imply the respondents may aspire to be value-added treasury centres rather than actually performing as one. As such, there appears to be some scope for moving treasury functions away from acting as a transactional treasury and towards a process-efficient, value enhancing or a strategic treasury.[[[PAGE]]]
Foreign exchange risk was ranked the most significant risk for many Asian corporate treasurers (Figure 2), given the increasingly diversified geography of their business operations and cross-border transactions in multiple currencies, many involving emerging currencies with strict controls in convertibility, cross-border remittance, etc.
While we have emerged from the recent financial crisis, the collapse of Lehman Brothers has taught us the importance of counterparty credit risk.
Counterparty credit risk and commodity risk were ranked the lowest by the respondents. While we have emerged from the recent financial crisis, the collapse of Lehman Brothers has taught us the importance of counterparty credit risk. In our view, counterparty risk should not be ignored, and organisations should establish limits and monitoring policies and procedures to manage concentration risk to ensure sufficient diversification across counterparties.
While 66% of respondents were exposed to commodity risk to varying degrees, more than a third are not managing the risk at all. This could be due to many reasons, including the impact of commodity risks being less material to the organisation, or because commodity risk is being managed by the purchasing or procurement functions instead of treasury. The trend in certain organisations is for treasury to be more involved and to centralise its commodity price risk and FX risk management so that the treasury team can benefit from potential synergies and can capitalise on its financial risk management and use of financial instruments.
Our results also show that approximately half of the respondents used basic risk management techniques or a standardised approach to manage their financial risks. The question is, is this sufficient given growing market volatility? In our view, there is scope for corporates to make changes to their risk management so that they can forecast or manage risk more dynamically and proactively.
We saw that the unprecedented swings and uncertainties seen in recent years in the financial markets have led many organisations to deploy some form of risk management strategy, the most common being the use of financial derivatives. However, half of the respondents did not apply hedge accounting, citing reasons such as the immaterial impact to the financial statements, the complexity and restrictive nature of the current accounting standards, the administrative burden, and the lack of appropriate systems to deal with hedge accounting requirements.
The lack of incentive to apply hedge accounting reflects the frustration of the accountants, treasurers, boards, investors and analysts alike with the existing hedge accounting rules. The complex rules have at times made achieving hedge accounting impossible or very costly, resulting in significant volatility in the financial reports, even when the hedges were considered economically efficient. However, after the onset of the global financial crisis, the International Accounting Standards Board introduced new rules in Quarter 4, 2013 to simplify and align hedge accounting to better reflect risk management practice.
Overall, the new standard is a substantial overhaul and provides a better basis for aligning accounting with risk management economics; it also makes hedge accounting simpler in practice. Such improvements present a compelling case for more organisations to revisit their risk management strategies.
Over 60% of the respondents used three core banks or fewer for cash management activities (Figure 3). This is consistent across a number of countries and seems to support the long-held view that, traditionally, some Asian corporates have built long-standing relationships with their local banks – they focus on building long-term relationships with only a handful of core banks to ensure strong credit line support rather than viewing the relationship as purely transactional. In Asia, it is still unusual for companies to enter into a request for proposal for their banking relationships on a periodic basis. In emerging markets such as Asia, appointing a banking partner for the entire region may be challenging in practice. But treasurers need to achieve a balance between operational and financial efficiencies as companies demand greater visibility and control over cash and reductions in transaction costs.[[[PAGE]]]
With scarce liquidity in Europe and the US during the financial crisis, visibility and control over cash have become critical for corporates around the world. The survey confirms the growing focus on internal availability of cash as pressure on external funding intensifies. However, over 40% of the respondents do not have even basic cash-pooling structures in place. There are several obvious reasons for this, the most significant being the financial regulation and tax implications. However, we have seen in recent years the increasing sophistication of liquidity structures offered by banks; the liberalisation/ internationalisation of some of the emerging Asian currencies (for example, the renminbi). This presents significant opportunities for organisations to enhance their cash and liquidity management strategy.
Security is the number one investment criterion for respondents; others were liquidity (9%) and yield (3%). Overwhelmingly, bank and money market deposits are the preferred investment products for excess cash, with over 60% of the respondents favouring this option over others. There is less appetite among organisations in Asia for taking risks in corporate debt and structured products as well as a lack of investment alternatives. Many organisations may not have sufficient capacity to perform credit evaluation or manage counterparty risk. So, the risk and return of these investment products are generally perceived as not being justifying the investment.
While there are clear advantages in leveraging treasury technology, the survey found that 53% of companies surveyed did not have a treasury management system (TMS). For those that have a TMS, the majority seemed to be using the basic functions. However, the importance of TMS cannot be understated. Treasurers in Asia are faced with significant and complex risks across a number of geographical locations, and the effective management requires timely, accurate and complete data, and risk analytics and reporting, to enable better decision-making. Without technology, treasury may spend a greater proportion of their time performing transactional activities rather than looking for strategic opportunities to perform value-add activities.
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Respondents’ key priorities in the near future are getting the right treasury personnel, more effective cash and risk management, and TMS implementation. The global financial crisis has won treasurers unprecedented attention from boards and business teams alike, and the contribution of the treasury function is now better understood. However, as the survey results reveal, treasurers in Asia still have some work to do in the areas of systems, processes and people to transform the treasury in order to add more value to the business. Treasurers should continue to evaluate the value they bring to their business outside of managing financial risks, and how they can align themselves to the strategic goals of the business.
Voon Hoe Chen is the Corporate Treasury leader in Singapore.
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