As European and American banks show signs of reduced lending in the Asia-Pacific region, there have been concerns about a liquidity crunch for corporates. At the EuroFinance conference held in May in Singapore, gtnews talked with Deutsche Bank’s regional head of trade finance cash management, Kaushik Shaparia, and HSBC’s head of global liquidity, Tom Schickler, about whether there is sufficient liquidity in the region.
There is still liquidity in the Asia-Pacific region, and for creditworthy companies it isn’t a big issue, despite a notable tightening in a few locations, says Shaparia. Indeed, there is even surplus liquidity in some markets and inflationary pressures are building up. The key impact on corporates is really pricing, which he observes has gone up although it has been stabilising to routine levels post-crisis.
Many participants at the EuroFinance conference in Singapore apparently reached the same conclusion about liquidity availability. In an online poll, 74% said they were not facing refinancing risks against 14% who said they expected to and just 12% who said they have actually faced refinancing risks.
While Shaparia and Schickler both see sufficient liquidity in the region, they also observe that there have been significant changes in practices over who provides funding. For bank funding, Shaparia says that some of the key players providing liquidity have shifted their focus. A number of European and American institutions are concentrating more on their home markets and working to preserve capital, so are lessening their focus on Asia and not participating in every deal. On the other hand, he says there are some financial institutions in the region that have seen this as an opportunity. Local banks in Asia have come out much better than their western peers in terms of their ability to serve local customers, so they have bridged the gap and Japanese banks have also expanded.
Additionally, Schickler says that corporates have been motivated to focus on self-funding because they see that their borrowing costs are only going to go up. Since the regulatory environment for banks has started to change, capital costs are higher and bank borrowing is going to be more expensive. Banks also have a diminished capacity to lend because of the greater capital requirements being imposed on them. Large corporates are able to self-fund, says Schickler, as many of them have been amassing cash since the end of the Nineties and profitability didn’t take a hit, even through the financial crisis.
The shift towards self-funding and high cash levels has resulted in several significant changes. One is that corporates recently have shifted their emphasis from principal protection to the treasurer and chief financial officer (CFO) focusing on increasing returns, despite the low interest rate environment. Throughout the financial crisis, multinational corporates’ profitability remained high and these companies continued to amass cash as there was a general reluctance to increase capacity. Due to the fact that the increasing cash asset is a growing proportion of the balance sheet, Schickler says “it could be a drag on turnover and profitability” if they don’t generate a higher return. He is therefore seeing more active management of the cash position by treasury and CFOs, which are using a combination of a duration management approach to generate an increased return and active management that includes purchasing of securities. While this approach takes more resources, the net result is that corporates are maximising what they have and managing excess cash much more effectively.
Top corporates are financing trade among themselves, says Shaparia, and also doing deals directly with their business partners. They have been conservative with the large amounts of cash on their balance sheets and have not reinvested the cash flow that they generate every year. Instead, they’re using it for financing.
Finally, Schickler reports that he has also seen acceleration in the trend to manage a global liquidity position. This represents a change historically from the practice whereby corporates would segregate their liquidity based on a combination of currency and region. The global position often then translates into a multi-currency pool, so that corporates have a single point of access to their global position. They then only need to go to one place rather than multiple locations to get access to their cash, with potentially just one currency to fund their position.
So while a lack of liquidity does not seem to be a significant issue in Asia-Pacific, changes in the roles of banks and the amount of corporate cash available have led to significant shifts in how corporates manage their funds and their financing needs
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