Published: May 01, 2009
The goal of the Corporate Treasury and Liquidity Research Programme is to help corporate treasurers and financial services providers better understand the market and provide a benchmark of current treasury practices and issues. The research programme explores the corporate treasury function broadly, encompassing treasury key issues and initiatives, organisation and staffing, liquidity management practices, treasury technology and financial services providers. This article provides extended extracts of the results of this programme. Further detail can be obtained from Treasury Strategies at www.treasurystrategies.com.
Treasury is undergoing a profound transformation across the globe. In response to market turmoil, globalisation, banking consolidation and the increasingly strategic nature of payments, treasury is expanding its scope of activities and becoming a change agent.
In response to market turmoil, treasury is rebalancing its cash portfolios and restructuring its banking relationships. Market turmoil has led treasurers to reduce portfolio risk, often by moving money out of active investments and into lower risk, passive investments such as money market funds (MMFs). In most regions, treasury is planning to rely more heavily on banking providers, expanding service usage with a core group of strategic partners. In recent years, we have observed the increasing maturity of treasury management encompassing deeper working capital and liquidity solutions.
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Extracts of Detailed FindingsKey Treasury Issues and Initiatives
Key Issues
Treasurers have increasingly sought to safeguard every dollar of cash flow throughout its lifecycle via appropriate controls, policies and procedures that identify, measure, monitor and manage risk. Those who have focused on this have been well served and have been able to continue their pursuit of a strategic agenda, while minimising the distraction from market turmoil. Many corporate treasurers are now revisiting their risk, liquidity and funding capabilities in light of recent market events.
In North America, liquidity management, risk management and credit / funding dominate the 2008 rankings of treasury priorities (fig 1). In Europe and Asia Pacific, FX risk management is the other key treasury issue cited by respondents, partly due to the significant decline of the USD relative to the EUR, the JPY and other Asian currencies.
Emerging Industry IssuesParticipants were also asked to evaluate the relative importance of key industry issues. Fig 2 shows a sample of responses from Large Corporate Treasurers.
Corporate Access to SWIFT – Many firms have directly connected to SWIFT to achieve straight-through processing (STP) of payments and financial information. STP not only improves efficiency and control, but also helps optimise working capital and risk management by accelerating access to critical information. Interest in Corporate Access to SWIFT remains strong across all regions but is of particular interest in Canada, Asia Pacific and Europe, where roughly one in three large corporate treasurers noted that this topic was a high or very high priority, with only slightly lower interest amongst mid-corporate and middle market companies.
Outsourcing of Treasury Functions – Many treasurers are reluctant to outsource treasury functions, given the strategic nature of treasury, the level of risk inherent in outsourcing, and the initial resources needed to migrate to an outsourcing arrangement. Despite these obstacles, large corporate treasurers in Asia Pacific and Canada expressed strong interest in outsourcing. [[[PAGE]]]
XML Standards – While some treasurers have aggressively called for standards, only a modest percentage of respondents expressed interest in XML standards. To some extent, this dynamic probably reflects the emerging nature of industry standards. While efforts are ongoing under the umbrella of ISO 20022, many treasurers are unclear as to how these standards will operate and how they can benefit from them.
SEPA Initiatives – The Single European Payment Area (SEPA) is of great interest to treasurers in Europe, which is no surprise. However, a material percentage of treasurers in Asia Pacific, Canada and the US also ranked SEPA as a high priority issue. In its final form, SEPA should enable treasurers to streamline banking structures and the execution of payments. The treasurers in these regions, that cited SEPA as a high priority issue, are likely to have, or plan to have, financial activities across multiple countries in the eurozone.
Trade Finance – A “perfect storm” has raised interest in trade finance solutions across all regions. Firstly, trade flows continue to grow and expand, with many companies now trading with emerging economies in Africa and Latin America, where banking infrastructures are less mature and risks are more difficult to identify and manage. These conditions make open account structures less feasible, leading to a resurgent interest in traditional trade solutions. Secondly, tightening credit markets have led firms both to seek alternative sources of financing as well as to re-evaluate their own credit exposures with their customers.
Planned InitiativesThe initiatives treasurers have planned for the next 12 months reflect both current concerns and the emerging strategic nature of treasury. A significant number of firms are selecting, implementing or enhancing their treasury technology. The one exception to the focus on technology is Asia Pacific – this dynamic is somewhat surprising in light of the relatively low adoption of treasury technology combined with relatively high staffing levels.
Many treasurers also cited process and policy reviews as key initiatives, including:
Efficiency initiatives to automate or expand reporting
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Treasury staffing levels remain lean (fig 4). In each of the three major regions covered by the study, departments have, on average, fewer than full-time equivalent (FTE) employees for both the middle market and mid-corporate segments. This lean staffing continues to prevail despite treasury departments being tasked to do more than ever across a range of operational, analytical and strategic activities.
Treasury staffing exhibits the least variance by company size in Asia Pacific. This is largely the result of the complexity of the banking and treasury environment as well as the expanded scope of such treasuries. The Asia Pacific region is characterised by multiple currencies, varied banking practices, and complex legal and regulatory requirements. This complexity tends to introduce a fixed cost component to treasury as even relatively modestly-sized firms must grapple with resource demands related to multiple currencies and legal/regulatory environments.
Given the dynamics outlined above, the relatively modest size of large corporate treasuries in Asia Pacific is surprising. Because Asia Pacific treasuries have lower levels of adoption of treasury technology, many are burdened with higher levels of manual activities. At the same time, many treasurers in Asia Pacific cited business development initiatives as key issues. These dynamics point to a disconnect, as Asia Pacific treasuries are being asked to do more in a complex environment with relatively lean staff levels and without the benefit of technology.
While the vast majority of respondents in all three regions reported that treasury staffing remained stable for the past year, a significant number of firms reported increases in treasury staffing levels. In many cases, treasury has been able to acquire additional staff in response to risk concerns or business expansion. In addition, globalisation and the pace of regulatory/ banking change in Europe has led many large corporate firms to expand treasury staff.
Notably, the region with the most apparent staffing pressures, Asia Pacific, exhibited relatively modest growth in staff levels. In contrast, while very few firms in France increased treasury staff levels, treasury departments in France enjoy some of the highest levels of adoption of treasury technology, minimising the need for additional staff.
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Liquidity management is a top concern for treasurers across most regions and turnover segments. Treasurers have not only rebalanced their portfolios in response to market conditions, but they have also continued to develop their internal liquidity practices to better monitor, aggregate and manage liquidity.
Portfolio Composition
Reflecting varied regulatory environments and traditional market practices, portfolio compositions vary widely by region and country (fig 5).
Corporations in Asia Pacific proportionally invest the greatest amount in bank deposits, reflecting strong relationships with their banks, less developed secondary markets for fixed income instruments, and the lack of penetration of MMFs.
Conversely, Canadian corporations hold the lowest percentage of their portfolios in bank deposits. Instead, Canadian treasurers have turned to direct instruments, despite the costs and risks inherent in such an approach. Canadian treasurers do not heavily invest in money market funds (MMFs) although these instruments would seem to be a natural fit, perhaps because money market fund providers have focused on the greater market opportunity in the US.
As fig 5 illustrates, MMFs represent a growing and significant percentage of treasury portfolios, as these instruments offer an attractive yield while diversifying or minimising credit risk exposures. Long a mainstay of the cash portfolios of French corporations, MMFs have gained an increasing share of corporate cash throughout the US and Europe, particularly in the UK.
Several banks have taken advantage of the recent market turmoil to market deposit products aggressively. Time deposits have enjoyed a resurgence and there has also been a movement from direct commercial paper investments into repurchase agreements, in order to minimise risk.
Money Market Fund Selection
Treasurers select MMFs based on risk, value-added services, advice and convenience (fig 6).
Risk: Unsurprisingly, given the recent troubles with mortgage-backed and auction rate securities, corporations in all regions cited underlying instruments as a top-2 criterion for determining which money market fund they select. Underlying instruments was the top criterion in North America and the second most popular determinant in Europe and Asia Pacific. Also reflecting a focus on risk minimisation and stability, North American treasurers cited the size of the fund as a selection criterion.
Value-Added Services: Treasurers in Europe and Asia Pacific cited value-added services as a primary selection criterion. Increasingly, MMFs are being sold not only as instruments, but also as part of the internal liquidity processes of a corporation. Fund providers are delivering value to their customers through enhanced reporting, ease of execution, and alignment of the fund with policy guidelines combined with transparency of reporting on underlying instruments. [[[PAGE]]]
Advice: Given the relatively emerging nature of MMFs in Asia Pacific, it is unsurprising that the quality of advisory services is the number one selection criteria for corporate treasurers in Asia Pacific. Notably, advisory services ranked as a high priority in Canada, which has limited experience with funds, but a low priority in Europe and the US, reflecting the relatively high level of comfort with MMFs.
Convenience: All things being equal, the concentration bank captures the majority of a corporations’ liquidity because they provide a convenient channel for investments. Furthermore, corporations – especially those with large cash portfolios – are increasingly selecting their concentration banks on the basis of their liquidity management capabilities.
Portfolio Rebalancing
Corporate treasurers plan to shift the compositions of their cash portfolios in response to market conditions (fig 7).
To understand how portfolios might shift, we asked participants to identify the instruments they planned to increase or decrease by 20% or more. In general, firms are reducing risk while looking to enhance yield, primarily via shifts into interest-bearing vehicles such as time deposits and MMFs.
Asia Pacific firms that project a 20% increase or more in their instrument profile plan to direct these funds into deposits. A small number of Middle Market firms noted an intention to invest increased liquidity in repurchase agreements. Across the Middle Market and Mid-Corporate segments, a material number of firms noted a plan to increase holdings in foreign currency time deposits, reflecting the global nature of these firms’ treasury activities.
Within Europe, we see two key trends – firms are planning to invest money further out on the yield curve via time deposits, and all segments show an interest in directing additional liquidity into MMFs. This dynamic underscores the increasing adoption of MMFs by European treasurers.
French corporate treasurers show distinctive differences by firm size. While all segments show an intention to direct additional liquidity into MMFs and time deposits, the segments vary in how they intend to invest in short-term cash. Middle market firms, possibly due to the lack of scale, will invest this liquidity in non-interest bearing current accounts and mid-corporates plan to direct incremental liquidity into interest-bearing current accounts. In contrast, large corporate firms plan to invest in repurchase agreements.
Within the UK, firms that plan to increase liquidity instruments project increases in time deposits, interest-bearing current accounts and MMFs. Large corporate treasurers expecting increased liquidity also cited commercial paper as a planned area of increase.
Bank Relationship Structure by Region
While most respondents use a mix of local, regional and global banks for their financial needs, a surprising percentage of large corporate firms in each region use only local banks. This signals that there remains a tremendous opportunity for companies to consolidate their activities to a regional or global banking structure to make it easier to control and manage cash.
Technology continues to be viewed as a critical tool by which corporations can improve treasury processes. In fact, our research suggests that more corporations are broadening their use of treasury technology, including TMS applications and bank account reconciliation technology. Adoption of treasury technology is driven by the demand for solutions that improve efficiency, control risk, and deliver critical information and insights needed to support strategic decision making.
Most Popular Forms
TMS applications continue to be more popular than treasury management system modules of ERP systems. While ERP treasury modules continue to improve, TMS technology is still viewed by many treasurers as being more robust.
Almost half (47%) of North American respondents use TMS technology. Dedicated, stand-alone TMS platforms are nearly as popular with European companies (36%) and have been adopted by about one in five (22%) companies in Asia Pacific.[[[PAGE]]]
Far fewer North American companies, only about 11%, are using ERP Treasury modules, which are more popular in Europe (32%) and Asia Pacific (27%).
The usage numbers for bank account reconciliation technology are similar to those for TMS technology across regions. North America is the top user (50%), followed by Europe (41%) and Asia Pacific (21%).
Beyond Treasury Management Systems
Treasurers are taking a more holistic view of technology. As they pursue goals such as increasing cash visibility, improving control over transactions and producing more flexible reporting, more treasurers are evaluating an array of technology options with an eye toward integrating those technologies with their TMS. For instance, 20% or more of respondents across all regions are using intercompany netting technology. In Europe, netting and financial risk management technology is emerging due to the abundance of intercompany transactions and the classification of FX as the biggest risk management issue in treasury operations.
Treasurers have increasingly sought to safeguard every dollar of cash flow throughout its lifecycle via appropriate controls, policies and procedures...
Another example of increasing adoption of broader technology solutions is the fact that more than a third of mid-corporates in Canada report using financial risk management technology. This dynamic reflects the need of many firms to analyse and manage commodity exposures.
About 40% of mid- and large corporates in the UK are using FX execution systems, and about one-quarter of mid- and large corporates in the US are using online investment portals. The growth in use of online investment portals has been rapid, reflecting demand for efficiency, improved advice and ease of execution.
Investment portals are growing in popularity as greater functionality is being added to these tools in the form of performance analytics, more fund choices, more timely performance reporting and investment policy management, including parameter controls on tenor and instrument limits.
Plans through 2009
Over the next 12 to 18 months, a significant number of firms plan to select treasury technology, with most looking to a dedicated TMS and, in Asia Pacific, bank account reconciliation tools. Many firms are also exploring additional solutions such as electronic bank account management systems, with which firms can better monitor and manage bank account mandates and authorised signatories.
Most firms are not using the full capabilities of their TMS, whether it is a dedicated system or an ERP treasury module. Unsurprisingly, of those firms planning to enhance existing technology, the vast majority is focusing on the use of their TMS. These activities include integrating additional banking relationships into the TMS reporting structure, automating additional treasury activities, and using additional modules, such as debt management and investment management.
With lean staffing and a growing list of challenges, particularly in the areas of risk and liquidity management, many corporations are looking to deepen their relationships with their primary banking providers. While many large corporate firms have sizable treasury staffs, the majority of middle market and mid-corporate firms operate with relatively small treasury staffs. As a result, these firms lack functional specialisation in key areas such as global cash management, financial risk management and optimisation of global liquidity. Accordingly, these firms are turning to their financial services providers to assist them as they grow and optimise their treasury operations.
Changes in Transaction Services Providers
A significant number of companies in all regions project changes in their transaction services providers. Nearly four in ten companies in North America expect changes to their transaction banking panels, and roughly 25% in Europe also expect change. Even in Asia Pacific, which is characterised by long-standing banking relationships, one in seven companies expect changes to its banking panel.
One key trend we have seen is the tendency of firms to consolidate more of their business with banks that can deliver a global solution. In the United States, the need to deepen relationships is most apparent, as over 40% of firms noted an intention to reduce the number of transaction banking providers.[[[PAGE]]]
The turnover segments most likely to reduce their number of banking relationships in the coming year are the middle market in the United Kingdom (66%) and the mid-corporate (47%) and large corporate (42%) segments in the United States.
Conversely, the market segments with the greatest percentage of companies expecting to increase banking relationships are Asia Pacific mid-corporate (26%) and large corporate (25%) and United Kingdom middle market (22%). The latter is the least stable market segment, with only 13% expecting to remain the same with their banking relationships.
Transaction Services Spend & Usage
Transaction services spend is widely distributed across the three regions, indicating that spend is driven more by company size and transaction volumes than by location or industry. For example, in the United States, the largest percentage of middle market respondents are spending $51,000 to $250,000 a year on transaction services, while the top category is $251,000 to $1m a year for mid-corporate firms and over $1m for large corporates.
Across all regions, the firms expecting to increase their transaction services spend over the next 12 months cited M&A activity and consolidation of internal processes / systems as the most popular reason.
Liquidity Services Providers
Relative to plans to change transaction banking providers, a smaller number of firms are expecting to add or drop liquidity service providers; this is a significant change from prior years, when change in liquidity provider was typically the highest frequency response. This shift reflects the current market environment. Burned by credit and liquidity disruptions, more companies may be sticking with proven and trusted providers. In Asia Pacific, 90% of respondents expect to make no change, in Europe 83%, and in North America 73%.
One notable finding about the companies that reported plans to make a change in liquidity providers is that they are also more likely to consider a change in transaction providers than those companies that have no plans to make a change in their liquidity providers. Thus, it appears that to win new relationships, banks must promote integrated solutions that address both transaction banking and liquidity management needs.
The market segments most likely to add liquidity services providers are large corporations in Canada (29%) and the United States (26%), as well as middle market companies in the United Kingdom (22%).
Bank Service Linkages
Approximately two-thirds of corporations in all regions use a single bank for their primary concentration – disbursement and collections provider. This strong majority is driven by the large portion of middle market firms in the survey that only have one or two banking relationships. However, a material percentage of corporations select a dedicated concentration bank – particularly in Asia Pacific and Europe, where one in five firms selects a standalone concentration provider. These firms tend to have more complex liquidity needs and larger portfolios.
Our research highlights the continuing consolidation of the banking industry. The type of consolidation that has been occurring in North America for several years is taking hold in Europe, leading to the emergence of pan-European banks. Whereas five years ago we saw different lead banks in most countries, now there are a handful of banks with top-5 positions in multiple countries.
Additionally, global banks are beginning to emerge, which should help corporations address their need for more integrated global solutions. HSBC, for instance, now ranks in the top 10 for every service across every region we studied – North America, Asia Pacific and Europe. Citibank, meanwhile, ranks in the top 20 for every service in every region and has a top position in the large corporate sector in both Asia Pacific and North America.
Other key findings regarding the roles of major banking providers include:
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