While much of the economic gloom and uncertainty has focused on western economies, Asia has also been affected. Gross domestic product (GDP) for Asia as a whole declined steeply throughout 2008 to levels below even those of 1998. However, recent economic data indicates that the worst is already be over; whether the recovery is ‘U’, ‘V’ or ‘W’ remains to be seen, but the signs are that it may already be underway.
The relative gains that Asian corporates derive from this situation will depend heavily upon the steps that their treasuries have already taken and will take in the future to support robust and efficient financial processes. Some corporations have already seized the opportunity to steal a march on their peers. Over the past year, they have been wringing every last drop of internal liquidity from their cash flow. Important elements in this process have been further optimisation of bank relationships and any cash-associated processes, including collections and investment. This optimisation has seen treasurers refocus bank relationships to institutions that are committed to Asia-Pacific, and are sufficiently capitalised both to meet their counterparty risk parameters, and importantly have the balance-sheet strength and strategic focus to continue to invest in the technology that will support their future transactional banking needs. This has led to a much more balanced discussion between bankers and corporate treasurers on the management of counterparty risk which was previously the agenda principally of the banker.
Corporates have simultaneously been enriching and extending relationships in their physical and financial supply chains in order to reduce risk and improve working capital efficiency. These steps have not only allowed their organisations to weather the crisis. They have also future-proofed them for more benign economic conditions over the horizon.
Those who have yet to take these steps need to be mindful of the urgency. Although the shape of the recovery is not yet clear, those who have not already taken advantage of the recent subdued economic environment to put their house in order will find their working capital and risks ballooning rapidly as demand increases.
Physical supply chain
A prominent theme in recent months has been the number of corporations that have moved swiftly to build tightly integrated relationships with key suppliers. These buyers have become increasingly supplier-centric, with the intention of creating more symbiotic relationships. Suppliers have been supported with the certainty of continued order flow in difficult conditions and in return have delivered faster turnaround times on products for urgent ‘tactical’ sales campaigns, as well as becoming more involved in buyers’ research and development initiatives. Large buyers have also been increasingly active in monitoring and supporting the financial health of critical suppliers. The intention is that as conditions improve and more business is available, these core loyal suppliers will keep supportive buyers’ orders at the front of the queue and allocate them the lion’s share of production capacity.
During the downturn, clients have obviously been focused on their credit exposure to customers and strengthening their credit control function through greater integration of information flows from their collection banks. Any improved discipline achieved over the past year around tighter accounts receivable (A/R) and debtor management needs to be sustained even when markets recover. As discussed in the next section, it is unwise to assume that availability of external liquidity will quickly regain its former levels to paper over any working capital cracks caused by growth.
Financial supply chain
A similar situation prevails when it comes to corporations’ financial supply chains. The economic downturn forced a sudden and renewed awareness of the mission-critical importance of robust banking relationships. Counterparty risk is also now far more obviously a two-way street. The sustainability of bank partners, and their continued ability to support existing relationships, has caused many treasurers to realign their bank relationships. As a result, diversification of banking partners has become a significant element in hedging these risks, but this in turn gives rise to dilution of efficiency from having too many relationships and the increased counterparty risk of having too few. Corporations have also become increasingly aware that they must mitigate these risks with a mechanism for rapid switching if required. As a result, the various SWIFT and enterprise resource planning (ERP) vendor initiatives in this area have been steadily gathering momentum.
While there are undoubted parallels between physical and financial suppliers, there is one critical difference. It is tempting to assume that as economic conditions improve, inexpensive external liquidity will rapidly reappear. For a number of reasons, such an assumption is unwise. While the lessons of the financial crisis of 1998 have seen most Asian banks and regulators well prepared this time round, the major global banks that have required bail-outs are another matter altogether. Political considerations are likely to dictate that such taxpayer-provided liquidity be prioritised for their domestic markets. Their absence as a source of credit will obviously constrain supply, which will have an effect on credit availability and its pricing. This is a strong incentive for building the strongest possible relationships with dependable relationship-focused credit providers as well as maximising the utilisation of relatively inexpensive internal liquidity.
The most alert banks have also been keen to refine their client relationships over the past year. On the one hand, closer client relationships derive high-quality risk data for the better management of regulatory capital under Basel II. On the other, tighter relationships also provide the opportunity to offer advice and devise solutions for clients that reduce risk from both parties’ perspectives. This greater understanding also ensures that proposed solutions are a tailored fit, meeting actual needs.
Banks adopting this more discriminating approach to client needs are also well positioned to provide the more advisory/consultative role that corporates are increasingly seeking. Broad consultative expertise across regulations, clearing systems, industries and organisation-transforming trends is of value to corporates refining processes or planning diversification into new areas. However, few banks have as yet grasped that this is not just part of a simple ‘tit for tat’ of immediate business in return for consultation, but crucial to the process of building durable long-term client relationships. Over time, that engenders a trusted relationship where the client enjoys the certainty of secure funding and high-quality consultancy, but in return makes revenue opportunities available to the partner bank.
Financial Architecture Transformation
There are a number of obvious trends evolving around corporates’ financial architecture. The need to manage receivables information efficiently in order to maximise internal liquidity has driven organisations to consider establishing collection factories. This is an area where a good cash management bank should be able to add value.
Where funding is available, another trend is for corporates to rationalise ERP structures. Many now have a multi-vendor, multi-version ERP infrastructure, which is clearly sub-optimal and needs to be consolidated. This desire to streamline also applies to smaller organisations. Where once they may have used a simple payment file upload to their bank, they are now looking for more streamlined alternatives. Therefore, whatever the size of organisation, integration efficiency is of paramount importance.
A further trend is the move to develop, implement and enforce robust treasury policies. In some cases, this actually consists of reactivating or enforcing existing policies that were previously dormant. Many policies relate to better management of risks, such as defining acceptable investment practices and the opening of bank accounts with approved banks. As these policies have taken effect over the past year in Asia-Pacific, there has in fact been a notable shift in the investment of liquidity, with corporates switching surplus cash away from asset management companies to highly rated banks.
Tighter credit risk management is also being implemented for customers. While this obviously includes close monitoring of customers’ payment and purchasing patterns, some corporations are going further. ‘Know your customer’ has been extended to ‘know your customer’s customer’. How fast are the seller’s goods being sold on by the distributor? Are the distributor’s order patterns consistent with that; is there a risk that the distributor is over-ordering in anticipation of their account being placed on credit stop?
Tighter technology integration with trading and financial partners continues to increase. In the banking space, large trade buyers are looking for host-to-host connectivity. There is also an expectation that banks will add value to this integration, for example by combining multiple purchase orders into a single documentary credit and providing real-time reporting on the payment status of those collections.
Connectivity methods are also changing in a way that improves information flow and so facilitates risk management. As corporates become less tolerant of proprietary bank technology, there is a drive to acquire more granular data without the proprietary ‘lock in’. By the same token, there is increasing reluctance to rely on internal technology when connectivity can be outsourced to a common standards mechanism for cash management or using open ERP-standard connectivity. As more corporates move more of their business to an open standards environment, each integration project they undertake becomes progressively less complex. By reducing the cost of entry with services such as SWIFT bureaus, mid-sized and smaller corporates now also have options to migrate their cash management business to these open architecture structures. In addition to facilitating transactional business, their improved information visibility also makes it easier for corporations to re-evaluate and adjust their liquidity structures to maximise usage and return on internal liquidity. In addition to improving liquidity management, non-proprietary connectivity also opens the door to improved risk management. Better cash flow visibility allows early detection of foreign exchange (FX) exposures, as well as customer credit and funding gap risks.
However, the above opportunities are only available if the organisation’s primary banking partner is committed to open standards in connectivity to ensure the delivery of relevant data in a timely and standardised manner. An extensive network is of limited value if the bank cannot coherently aggregate client-specific data or deliver consistent transactional service across it.
It is apparent that financial conditions over the past year have driven many corporations to undertake a fundamental re-engineering of their internal processes and commercial/financial relationships to reduce working capital investment as well as improve operating efficiency. Improving such matters as use of internal liquidity is not just about reducing the cost of capital – it is also about risk and long-term sustainability. Bank capital is more restricted and corporations with poor working capital discipline and inefficient utilisation of internal liquidity represent a less attractive risk, so developing bank relationships that will guarantee credit support becomes harder. A similar dichotomy applies on the bank side of the fence.
Very few banks have appreciated that a significantly different approach is now required to match the changing corporate mindset. Rather than paying lip service to partnership clichés, they realise that clients who have had serious concerns over reliable credit support in the crisis are now looking for symbiotic bank relationships to match those they are developing in their physical supply chains. From a client perspective, such banks are essential if corporate treasury is to continue delivering greater shareholder value through working capital efficiency and supply chain enhancements.
To learn more about HSBC Global Transaction Banking, please visit their gtnews microsite.
China's bad debt markets are such a hot commodity that distressed assets are being sold on Alibaba’s Taobao ecommerce platform alongside household products. But the IMF warns the situation is unsustainable.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.