In recent years, companies have explored more diverse sources of funding and many have lessened their dependence on banks. At the same time, reports indicate that corporate finance budgets are either flat or, in many cases, have shrunk as more companies employ technology to automate manual processes, shrink departments, close offices and cut other costs.
Corporate treasurers face an exceedingly challenging operating environment globally. Despite moves to reduce complexity, improve transparency and strengthen regulatory oversight following the 2008-09 global financial crisis (GFC), financial markets are more vast and interconnected than ever before.
Although methods of accessing credit and financial product types continue to evolve rapidly, bank lending remains the dominant funding source for corporates. Bond issuance has remained steady, cast against the prevailing low interest rate environment as central banks in both the US and UK delay interest rate hikes and Europe and Japan slide further into unprecedented negative territory.
Cheap, secure corporate funding is readily available, yet growth remains heavily fragmented across different industry sectors and geographies. Volatile commodity and currency markets are placing greater pressure on risk management strategies for both banks and their corporate customers alike. As a result, corporate treasurers are forced to remain open and receptive to alternative disintermediated solutions such as peer-to-peer (P2P) lending and crowdfunding.
Moves by China to open up the onshore bond market to foreign institutional investors, further develop the domestic Chinese bond market and the progression of the European non-investment grade bond market are broadly viewed positively by chief financial officers (CFOs) and corporate treasurers seeking a broader, more diversified funding mix.
Initial public offerings (IPOs) and merger and acquisition (M&A) deal flow is expected to taper over the course of 2016, following the flurry of activity at the outset of 2015, exhibiting another major driver of short-term credit demand traditionally served by the major banks.
Competitive pressures and the need to remain innovative through research and development (R&D) form the backbone of corporate finance demand at a time when consolidation, expense control and rationalisation predominantly steer strategic planning.
This was evidenced by the online Chinese marketplace Alibaba Group, which sourced up to US$4bn in loans from at least eight banks to support ongoing expansion, investments and new acquisitions for improving supply chain efficiency and the overall customer experience.
Uncertainty and caution are repeatedly highlighted in corporate profit announcements, despite broadly positive underlying sentiment towards domestic and international trading conditions.
Caution versus change
Broken down by business size, a number of interesting trends continue to strengthen in corporate finance.
Research conducted in Australia by banking analysts East & Partners demonstrated the difficulty that small businesses encounter accessing credit relative to large corporates. When 983 CFOs and corporate treasurers were directly interviewed in July 2015 on specifically what prevented them from accessing credit, 37.2% of respondents indicated that their business was sufficiently capitalised and had no need for additional debt.
Significant variance by business size was clearly evident however: 69.0% of institutional enterprises were not seeking any additional debt funding whatsoever, whereas only one in five micro businesses did not require additional credit (22.5%). One in two institutional enterprises had no real issues accessing credit, in comparison to only one in five small- to medium-sized enterprises (SMEs).
The research revealed that over 60.2% of SMEs were prevented from accessing credit due to a slow credit approval process, while one in two small businesses also cited tight credit conditions or undesired loan terms. In comparison, a mere 15.3% of the Top 500 enterprises by turnover were prevented from accessing finance due to a slow credit approval process and only 5.9% cited inappropriate terms.
The reasons that businesses had not shifted away from their lender bank to a non-bank credit provider? While one in two businesses were dissatisfied, they had simply not considered any alternatives. As expected, the smaller the size of the business, the more likely they were to borrow against their home property.
Interestingly, 67.0% of Australia’s largest enterprises expressed satisfaction with their bank and had not considered alternatives, while one in three were concerned over the stability and strength of non-bank lenders.
Institutional enterprises and large corporates remain closely integrated in their long standing commercial banking relationships, citing key stability and security concerns towards non-bank funding sources. Small business owners do not display the same level of loyalty, characterised by negative sentiment and a high willingness to consider alternative corporate financing solutions.
SMEs are turning to non-bank credit providers in ever greater numbers and incorporating alternative working capital solutions such as invoice financing.
Banks are embracing the rapid pace of change and acquiring, partnering with or investing equity into quickly growing ‘fintech’ start-ups. In Australia, Commonwealth Bank paired up with specialist online lender OnDeck; ANZ and Sydney-based start-up Honcho have partnered and new online small business lender Prospa and Westpac established a working referral relationship. National Australia Bank is investing A$50m into an “innovation fund” over the next three years in domestic and international disrupters to meet growing customer demand for new and improved corporate finance solutions.
Unpredictable reactions to easing monetary policy and a steady lean towards risk aversion will continue to hamper central banks efforts to boost corporate credit demand, while clearly structural demand issues remain firmly in place on a more granular segment and sector level.
A decline in the return on capital employed of globally listed companies over the last decade has been noted in recent EY and PWC reports. This is despite businesses taking an increased focus on balance sheets since the financial crisis in 2008.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?