The global financial crisis of 2008 has had a lasting effect on regulators, banks and corporates alike. A number of trends that we are experiencing today have resulted directly or indirectly from the financial crisis, including:
- Corporate cash stockpiles being at historically high levels.
- Tightening of banking regulations: more stringent capital and liquidity requirements.
- Strong intra-regional trade that resulted from the strong economic growth of China and India, multinational companies (MNCs) and banks directing a lot more of their activities and investments into the region.
As a result, there is an interesting convergence that is taking shape: banks in Asia now have a huge opportunity to tap into the corporate cash stockpile to shore up their balance sheet in order to finance trade in the region.
Cash Tsunami: Record Corporate Cash Levels
Corporate cash in recent years has reached unprecedented levels. This liquidity has been built up mostly by MNCs based in Europe and the US. The latest data estimates that the cash pile is approximately US$5.5 trillion: US$3.8 trillion in European non-financial companies and US$1.7 trillion in US non-financial companies.
A sizeable concentration of this cash resides in a handful of ‘cash kings’. The top 50 holders of cash in the US for instance, accounted for close to US$750bn in 2011. However, more than half of the cash does not reside at the corporate head office, but was sourced as overseas revenue and remains overseas for various reasons, including unfavourable tax treatment for fund repatriation and regulatory constraints limiting the free flow of cash out of emerging markets. Nonetheless, having the visibility and ease of access to this cash (residing overseas) is critical as it presents a great opportunity to optimise the working capital cycle of an organisation.
Regulatory Tightening on Banks
Amid more stringent regulatory oversight on banks, a corporate should ensure that their cash is placed with a bank that provides the appropriate solutions suited for the strategic deployment of the cash when required. To enable a complete appreciation of the current landscape, here’s a quick overview from a bank’s perspective:
Increased capital requirements
Banks will essentially need to triple their capital requirements (phased over the years leading to 2019). While this signifies additional pressure on banks across the board, the key difference between international and Asian banks is that Asian banks are in general much better capitalised than banks in the western hemisphere. This is largely because of two factors:
- Painful lessons learnt during the Asia currency crisis of the late 1990s.
- Gradual shift of commercial and economic epicentres from West to East, bringing about a greater store of wealth in Asia.
Asian banks are nonetheless expanding their asset book and lending at a much higher rate, resulting in a need to bring in additional capital or liability. The Chinese banking industry, for example, has maintained an average asset growth rate of above 20% since the mid-2000s and this is not sustainable unless there is a corresponding rise in deposits.
Banks are expected to be self-funding (with some central banks imposing limits on borrowing from their subsidiaries or branches in other markets), so can no longer rely heavily on gathering client balances from overseas branches and routing that within their network for funding purposes. This forces banks to gather deposits at localities where liquidity needs to be deployed for funding purposes. To complicate matters, a good portion of corporate cash is denominated in local currencies across Asia, but borrowing for trade financing is largely denominated in US dollars. The picture that emerges is one whereby it is not enough for banks to simply ‘chase’ corporate cash where they see huge pile-up in the market.
Banks need to put forward propositions based on a clear understanding of what drives corporates to stock up cash, including what and where is the intended use of the cash and what are their internal treasury considerations on the preferred locations for storing of cash. International banks have managed this through the provision of global liquidity/cash pooling solutions for decades, leveraging their extended network of branches to gather their MNC clients’ funds and helping to consolidate these funds into key global cash pool hubs such as New York, London, Hong Kong and Singapore. By doing so, banks overcome the limit caps imposed on inter-branch borrowings as the surplus corporate cash can be moved within key financial centres where it can be better utilised for funding purposes (notwithstanding the cash trapped in regulated markets such as China and India).
For most Asian banks, however, global liquidity solutions for clients are a relatively new area. This is largely due to their limited branch network. As a result of having a very healthy level of corporate deposits in their home base, the composition of these would mostly come from the local corporate or consumer clients, and to a lesser extent from MNCs from the US and Europe. To compete for a slice of the pie, offering high yield to attract corporate deposits becomes a tempting alternative. However, under the new Basel III regulations, this may not be a sustainable strategy because Basel III accords a higher value to client deposits of the operating nature, versus one obtained primarily based upon offering higher yield than market.
RMB: An Emerging International Trade Settlement Currency and Store of Wealth
As cash piles increase, corporates also need to recognise the importance of preparing themselves for the internationalisation of the Chinese yuan or renminbi (RMB). The currency’s progress has been encouraging, with an estimated 10% of China’s trade now settled in RMB. Central banks from emerging markets have also started to place their reserves in RMB, fuelled by the increased bilateral engagements between China and these markets (Central Bank of Nigeria is a good example).
As the Chinese government steps up the pace of liberalisation, the latest being an announcement in April 2012 about plans to set up a cross-border payment infrastructure with a 17-hour clearing window capable of handling settlement during US and European working hours, a much greater proportion of global trade settlement can be expected to re-denominate to RMB.
Corporate cash levels are at record high, and the opportunity cost of not optimising them for the intended corporate purpose are greater than ever. While there will be a large number of banks in Asia that are fighting to capture a larger share of corporate cash across the region, it is by no means easy access for every bank. MNCs will stand to benefit from working with a banking provider with:
- The ability to provide visibility and control of the liquidity thanks to strong local knowledge and access to local markets that is coupled with global capabilities and a network.
- Strong capital and balance sheet management practices, scalable in terms of future regulatory frameworks to ensure the safety of deposits, in addition to adequate channels for the optimal deployment of assets.
- A clear view of the RMB internationalisation opportunity, with the ability to advise and execute on re-denomination of transactions, as the currency gains greater prominence as an international currency for trade settlement and a store of wealth.
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