Bank fees are increasingly being scrutinised by corporate treasurers and finance directors. Both the lack of transparency and higher charges have already triggered initiatives, such as the bank services billing (BSB) initiative developed by the non-profit industry group TWIST to develop a single, uniform standard for cash management invoicing. Additionally, the introduction of new regulations such as the Basel III capital adequacy regime are triggering various discussions on costs and fees between corporates, their treasury departments and banks.
Bank relationship management is nothing new though and has always recognised that a bank relationship differs from a ‘normal’ vendor relationship; corporates have a financial dependency on their bank and there is typically a deeper and advisory type of relationship between the two if the latter is being well-managed.
Typically when a corporate reviews its bank(s) the relationship’s qualitative aspects are to the fore. The treasurer or chief financial officer will ask: do I like my bank relationship manager; do the bank’s products work well; and is its service good? Each of these is an important consideration, but the lack of a more quantitative discussion is odd when we are talking about finance and numbers. Yet the only numbers typically discussed are the corporate’s latest quarterly earnings and – sometimes – those of its bank too.
Yet a bank relationship should be more data-driven and it should also be clear that the relationship needs to be mutually beneficial for both corporate and bank alike: a true win-win situation.
Regardless of the corporate’s size or the industry in which it operates, a bank relationship can be defined as a connection between the financial cost that a company recognises as being spent on banking and the client revenue turnover component in the top line of the bank’s profit and loss (P&L).
It is important to first calculate the revenue contribution that the corporate generates for the bank. Isolate both the direct banking costs and also the opportunity revenues, for example the interest margins on current accounts and arbitrage revenue recognition on treasury products. Together these two types of costs give you the gross banking revenues, or ‘the wallet’ as it is often referred to.
A second component to understand is the bank’s capital requirement, which reflects a fixed set of rules based on the Basel III framework. It is possible for corporates to isolate their own capital requirement impact on the bank, based on the set of products that they use from that institution. Dividing the gross banking revenues – the wallet – by the capital requirement, gives the return on solvency figure. This figure is a useful way of comparing banks on a like-for-like basis, as it isolates the operating costs of the bank to focus instead on elements that the corporate can influence. If, for example, the bank has a target return on equity (ROE) of 10% and the corporate generates a return on solvency of 20%, the bank has more than sufficient business from this client to generate their ROE.
Corporates that carry out this type of analysis may discover that they have more core banks than expected. This is a starting point for treasury making decisions on how many core banking relationships their company should actually have.
The capital requirement changes as the company’s risk rating is taken into account, along with the associated risk weight of the product. This is important as products have different risk weights – bank guarantees carry a different risk weight than a credit facility, for example.
Our own WalletSizing methodology basically follows the Basel III standard approach, rather than the internal ratings-based (IRB) approach. Typically the capital requirement calculations using the Basel III approach can be around 20-25% higher than the banks themselves may need using their IRB approach. The system gives an overview of all banking products across the industry, the value it brings to those banks and how profitable each corporate is for their banks. In order to benchmark your own wallet it is necessary to take into account that the amount of bank business very much depends on the profile of your company, including its size, geography and leverage.
Our own benchmark is calculated by dividing the annual banking revenues for all bank products that a company uses by the corporate’s sales. This provides the wallet, expressed as a percentage of the turnover of the corporate. Using this benchmark, the average wallet is typically between 2 and 200 basis points (bps). This is a fairly wide range – depending on type and profile of the company, credit rating and pricing that has been negotiated – but is useful in giving an initial idea into how much banking revenue a corporate generates for all its banks on an annual basis.
Before you start
Many treasurers who would like to change the banking game and start doing the numbers for their bank relationships should first undertake a little preparatory work. A few tips before you get started:
• Getting the data is usually difficult, given the lack of transparency with banks and the complex and large number of systems that corporates also use. It is still possible though and smart treasurers can collect all of it with a little effort.
• Do not try to see this as a reconciliation exercise. Most of the value is in understanding the numbers, for which you do not need the last penny to reconcile. Think the 80-20 rule here.
• You can do the analysis manually once, but oversight can very easily be lost if you do not automate it. An Excel spreadsheet is, by default, only 2D and will not allow a lot of trending and/or scenario analysis without serious programming.
• Calculating your wallet is not about reducing bank costs only, but very much about taking your bank reviews to the next level and also identifying if certain banks are making a loss on you as they will be with you at some point to raise fees or call in the credit.
• When you establish an orderly process to update your numbers twice yearly, you will get better at it and have a perfect overview of your bank relationships.
• Most bank relationship managers lack a complete and accurate picture of the actual revenues they make on their clients; especially not on all products and fully taking into account the capital requirements. Having the data yourself as a corporate treasurer will give you a clear edge and allows you to discuss the numbers that matter, as well as bank fees and margins.
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