What is the shape of the new regulatory and business landscape for corporate funding and banking that is emerging in the post-crisis era? More than five years on from the 2008 crash this was one of the key questions addressed at the 2014 Association of Corporate Treasurers (ACT) UK conference in Glasgow, UK, on the second day. According to the Royal Bank of Scotland’s (RBS) chairman, Sir Philip Hampton, the new landscape is still evolving but the baking sector is sure to be smaller as one of the key ‘intended’ consequences of the post-crash changes. Already, there are 12% fewer banks in Europe and the US than there were in 2008, he said in his opening address, but financially those remaining banks are stronger with around £300bn more in capital held collectively.
The ‘new normal’ environment is also marked by a retreat from globalisation, contended Hampton, with less cross-border lending on both sides of the Atlantic. UK banks have reduced their overseas lending by 22% in the past five years, for instance, and cut back their exposures to France, Germany and the US even more sharply – although by contrast lending to China in the past three years has increased 73% to US$80bn. This reflects the on-going growth and strength of the emerging markets – a topic addressed later on in the day at the 2014 ACT Conference.
The banking sector is being shaped by three main factors, said Hampton: the need to strengthen capital ratios; regulators’ desire for overseas entities to be separately capitalised; and governmental pressure in many countries for banks to give priority to domestic customers. All three trends will have consequences for funding and corporate treasuries, particularly those large multinational corporations (MNCs) that span the world and are likely to see a retreat from globalisation and ‘universal banks’.
The future will be one in which fewer banks operate internationally but work together more and more to forge new relationships, which means a revival in correspondent banking. “The need to strengthen capital is clear worldwide, so any return to the conditions of the pre-crisis era is still a very long way off,” concluded Hampton.
Emerging Markets: The New Economic Stars
A wide-ranging session hosted by Deutsche Bank followed the morning’s assessment of the ‘new normal’ banking and funding environment. It focused on the world’s new high-growth emerging economies and the various challenges facing companies that want to expand beyond their home markets into new territories. Strong demographics and increasing growth rates suggest that countries such as Mexico, Nigeria and Indonesia will be among the emerging market stars of the future, replacing the BRICs (Brazil, Russia, India and China) which have led global economic growth for so long now. As ever with emerging markets, however, there will be new opportunities and new challenges facing corporate treasuries and they won’t necessarily be the same as with the BRICs. Local laws and norms will throw up their own unique problems.
As James Binns, head of working capital advisory for the Europe, the Middle East and Africa (EMEA) region at Deutsche Bank noted, emerging market (EM) working population growth is significantly outpacing that of the developed markets and the capital flows are no longer one way as a result. Burgeoning middle classes in Nigeria and elsewhere present burgeoning opportunities. At the same time, while EM currencies have generally appreciated against that US dollar over recent years, more recently that trend has been reversing with significant falls in some BRIC countries’ currencies and in other emergent nations.
Unilever’s Emerging Market Lessons and Treasury Centralisation
Consumer goods giant Unilever, whose presence in so-called ‘new markets’ dates back to 1888 in the case of India and 1933 in Indonesia, has been adapting its approach to treasury in response to the on-going rise of new Far and Middle Eastern markets, plus African and Latin American economies. “The Unilever group traditionally had a centralised approach, with corporate finance focused in the Netherlands and the US, and five regional treasury centres,” said Hans van den Bosch, director of global treasury operations in his address to the ACT Conference.
“In 2011 we took the decision to centralise everything in Switzerland and apart from one small centre in Singapore, closed all of the regional treasury centres (RTCs). Switzerland now handles the group’s €2.1bn investment portfolio as well as its annual €30bn of foreign exchange (FX) hedging.”
Unilever also used to deal with over 450 banks worldwide a decade ago but from 2006 onwards it has concentrated on four key banks – Citi, HSBC, JP Morgan and Royal Bank of Scotland (RBS) – and reduced the total of 450+ regional banks to 130, introducing more efficiency and streamlining to its procedures. However, since the centralisation project in Switzerland, this strategy has been rethought again with the total of four key banks doubling to eight post-crash and the figure of 130 regional banks is again under review. No doubt this is partly driven by post-2008 worries about bank counterparty risk and a resilient cadre of core partners
Motorola Solutions Treasury Centralisation Experience
Next up at the Glasgow ACT venue in Scotland, was Tim Westcott, EIA director of treasury for Motorola Solutions. He described how his group had moved from a decentralised treasury operation to a centralised one over the past 15 years and ultimately established a shared service centre (SSC) in Krakow, Poland. “We’ve tried to change our European centre to a global one, although the move has been resisted by our Asia operations, which insist that their work can’t be handled effectively from Europe,” he added, highlighting a perennial problem with centralisation, which is ensuring employee buy-in.
In Krakow, Poland, Motorola Solutions’ employee costs were around 40% cheaper than they were in the UK, although this cost advantage has more recently narrowed. “A large number of other companies have also moved their SSCs to Krakow, so there has been huge competition to attract the limited number of suitably qualified staff,” said Westcott, indicating how costs have risen and competitive advantage vis-à-vis the UK dwindled. “This has meant offering 40% pay rises to retain some of our key Polish personnel.”
Other problems encountered by Motorola Solutions include trapped cash in countries such as Iraq, where the company might invoice in dollars but must accept that it is highly likely that payment will be made in the local currency.
The M&A Revival: AstraZeneca Tax & Treasury Head Speaks
“If treasurers ruled the world … treasury would play a pivotal role in M&A from start to finish,” suggested an afternoon ACT Conference session hosted by Bank of America Merrill Lynch (BofA Merrill). Richard King, managing director and head of UK corporates and debt capital markets admitted that when the bank had picked M&A as a topic for the trade show it had not realised just how prevalent merger and acquisition activity would become in the opening months of 2014, with a surge of deals announced so far this year. Indeed, the second day of the ACT show began with news of a planned £3.8bn tie-up between UK electrical retailer Dixons and the mobile phones chain Carphone Warehouse, which only recently extracted itself from a failed tie-up the US’ Best Buy retailer.
Renewed M&A activity on both sides of the Atlantic is the result of several drivers, including high corporate cash balances, positive earnings momentum, a more positive economic outlook after six years of stagnation or recession, and the fact that the cost of funding remains at historic lows (while low interest rates remain). Add to these factors the fact that company board members are feeling more confident about economic prospects and it is clear to see why they have given the green light for so many deals to go ahead this year.
According to BofA Merrill’s treasury solutions executive, Dennis Sweeney, the difference from the pre-2008 M&A boom era is that treasurers are now part of the ‘deal team’ and are increasingly involved from an early stage. Treasurers’ enhanced role is particularly important at the latter integration stage as well, when evaluating the anticipated synergies and helping to ensure that they are actually realised.
The afternoon M&A treasury panellists at the 2014 ACT Conference that participated in the bank’s session, included representatives from the pharmaceutical firm Shire and the brewer SAB Miller, both of which have been active in M&As in recent months. Also present was Ian Brimicombe, group head of tax and treasury at UK/Swedish pharma giant AstraZeneca, which is of course currently at the receiving end of an unwanted £63bn takeover bid from US rival Pfizer.
AstraZeneca has itself been an acquirer in recent times as it looks to build its three core businesses via M&A deals and Bromicombe said that treasury should “stand together” with management in the very early stages of any proposed deal and also liaise with colleagues across the organisation in order to get a fully coherent financial perspective. AstraZeneca also keeps the ratings agencies fully updated on any of its activity on the M&A front, he said, particularly if there is the possibility or a deal resulting in a one-notch downgrade. However, it is also common for many companies to wait until after the event, only informing the ratings agency once a deal has been concluded.
It appeared that not all the panellists were necessarily representative of their audience, however, because when the session facilitator John Grout, the ACT’s policy and technical director, asked attendees to raise their hand if as a treasurer they were sufficiently involved at an early stage in their company’s M&A strategy only around one in 20 did so. There is still work to be done therefore in bringing treasurers into the centre of M&A deals.
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