Published: April 20, 2010
The financial crisis has at least taught people in finance, besides a couple of other very valuable aspects, three major lessons:
But previous experience should have taught us something including the failures in the early 70s of Herstatt in Germany and Barings in 1995 in the UK. At the beginning of 1990 Ulrich Cartellieri of Deutsche Bank stated that “the banks are the steel industry of the 1990s“, and in July 2007 Jochen Sanio, president of the German financial supervisory board (BaFin) said that we were threatened with the worst banking crisis since 1931. From all this we should have deduced that in an environment where the desire for ‘pick-up yield‘ was all that mattered, and the pure availablity of liquidity was never questioned, something was definitely amiss.
When we at Porsche Holding GmbH, Salzburg/Austria, placed the last ABS transaction in 2006, at 5 bps (!) above EURIBOR, we wondered why people should read through all the documentation needed in an ABS transaction to identify what risk you are paid for as an investor and then to take on that risk at such a price.
But it was just that experience which made us rethink our banking relations.
As the largest automotive dealer group in Europe with a turnover of approximately EUR 12.5bn, sellling the whole range from VW, AUDI, SEAT, Skoda to Peugeot Citroen BMW up to Porsche, Bentley & Lamborghini with main coverage of France, Netherlands, Austria and the CEE countries plus China, and being 100% family-owned, our profile, from the treasury perspective, was as follows:
Mainly cash flow business, sophisticated cash management, money market business, some IRS, strong FX business in CHF/HUF/CZK/SKK/RON/UAH;
Interesting fee business: securitisation of the financial services portfolio, from time to time larger long-term financing as USPP, small asset business from the pension trust.
Although we have tried to diversify our funding sources, there is still a high dependency on banking finance.
As a result of these financial activities we do have a circle of core banks who are eligible to bid for our fee business, while also providing the necessary liquidity for our growth by the acquisition of retail businesses, internal growth which has additional needs for working capital, and the growth in the accompanying financial services business which is the main liquidity absorber.
This circle of banks is complemented by some special finance institutions, our so-called regional/other banks which reflect the need for opportunistic bidding in special/local segments. We are not a frequent issuer of capital market instruments and are ‘consultancy resistant‘: in other words our M&A business has been executed from our own resources. Consequently although we have tried to diversify our funding sources, there is still a high dependency on banking finance.
Before the financial crisis we critically analysed our banking relations, and also considered a couple of external signals which did not fit into the general picture.
The German Association of Corporate Treasurers (VDT e.V.) in 2006 organised a poll analysing banking relationships in German corporates. To the question: Under which aspects do you value the bank-client relationship?, senior bankers and group treasurers responded as follows:
Banks
Corporates
As treasurers, we need to ask ourselves whether we are guiding our relationships with the most important suppliers in the right way. According to these replies, the answer is definitely no. Treasurers appear to cling strongly to the old, person-related “I trust you, you trust me, plus a little bargaining about the pricing“ attitude, whereas the bankers seemed to view their relationships much more rationally. [[[PAGE]]]
Again, the signs were there before the crisis, but to a certain extent we ignored them. But the experiences from the crisis have taught everybody in the treasury business that yes, the old-fashioned core bank philosophy is dead and yes, the bank-corporate relationship needs to be steered primarily on the hard facts of ROE from the perspective of the banks and the rationale of which banking services a treasurer may require or – as far as fees are concerned – can negotiate.
With this strong conviction we at Porsche Holding Group Level developed a banking steering concept based on three pillars:
1) Evaluation of the existing range of banking services required
Goal: Transparency in your own negotiation power
2) Approximation of profits (spreads/margins/fees) delivered to banks
Goal: Allocation of expenses to a bank/bank group in absolute figures
3) Counterparty-limit system
Goal: Monitoring the solvency of a bank/banking group measured by its latest accounts, rating and CDS spreads (as an early indicator)
This results in a one-page information sheet which is reviewed at least once a quarter and/or when relationship talks take place.
Although this provides a good overview of the overall relationship, we are aware that the results are just approximations.
We cannot be precise until we know the banking side better.
How the individual bank internally weights certain instruments in respect to allocation of its capital is quite problematic. Here banks vary considerably and are not willing to provide the necessary information.
We still talk to the banks which take a big portion of our volume which we think is attractive, but are then confronted with the banks‘ complaint of not earning anything on this volume. Perhaps some banks should consider their production costs?
Collecting the data is hard work, because the necessary information is not standardised or easily accessible; for instance, within one banking group there are many different types of account. Nevertheless, for normal banking relationships we are well prepared; this sounds a little bit like VaR which is a useful figure in a normal market environment but what good is it in critical markets? During the crisis banks‘ behaviour was driven by their fight for survival; this showed that all the soft factors do not count at all when it comes to serious tensions. The factors being emphasised by the banks did not really count any more – it was just a question of avoiding risk. [[[PAGE]]]
At the start of 2009, being an automotive company was no fun at all. Credit spreads rose tremendously for whatever reason. Despite for years having communicated transparently to our core banks our strong and consistent business model, as well as the strong business figures, large foreign banks in particular just wanted to get out of automotive risk. Those caught in the process of a merger tried to re-invent the maths so that 1+1 =0.6 or even less.
On the other hand we had a couple of Austrian-based banks participating with large volumes in a Schuldscheindarlehen (a German private placement) in March 2009; they believe strongly in the company, are aware of the real risk factors and gained a coupon which they had never seen before – and from my perspective will hopefully not see again! However one of the Mandated Lead Arrangers – a core bank – in that specific transaction was not even willing (or able ?) to put EUR 2m on the table to make the placement volume a good round figure – a situation which would have seemed ridiculous two years before.
The large banks in particular are still struggling to find a defined, obvious and sustainable business model which is supportive of the client's business. There is widespread uncertainty about the impact of regulation proposals under discussion – on the banking side as well as on the corporate side.
Needless to say we urgently need better supervision/regulation of certain instruments/markets/market participants, but this always runs the risk of a regulatory overkill. Most companies will try to increase their number of banks to mitigate dependence instead of reducing them; the one stop-delivery-shop philosophy has lost out to a diversified work-intensive approach. Corporates are seeking ways to diversify their investor basis but still struggle to harmonise/standardise/centralise systems to make economies of scale.
We will see a new set-up of banks which is not clear as yet; we will see old ideas getting revitalised, e.g., the idea of a bank established by corporates for corporates.
We will also have to resolve questions as to why it is only banks that are allowed to have accounts with the ECB and if – when banks do not deliver their core lending function – there are other ways to support the corporates with funding. But there is no basic right for corporates on funding. Proof is always needed that the return on the financed project/business is profitable for both bank and corporate.
And again derived from the past:
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 […]
