For years leading international banks talked up their desire to grow in Asia’s cash management industry. The sentiments were genuine, but a number of these institutions – most notably some based in Europe – had to do a U-turn over the past year.
Their need to de-emphasise their presence in Asia has come courtesy of a combination of troubled home market conditions and the need to meet Basel III requirements in January 2013. Mounting concerns over the commitment and ability of European policymakers to defend flailing economies caused lending rates in Greece and Spain to skyrocket, the euro’s value agains t the US dollar to plummet to a two-year low on July 13, and stock markets around the world to get the jitters.
Such volatile conditions underscore to companies and financial institutions the importance of effectively managing their working capital, managing counterparty risks and preserving liquidity amid increasing market volatility.
For the cash management providers that most impress, the retrenchment of key competitors amid volatile conditions has offered an enormous opportunity. And Asiamoney’s 22nd Cash Management Poll reveals some familiar faces that continue to stand out from the crowd.
This year’s poll was by far our largest yet. In total, 1,548 financial institutions and 6,153 corporates participated, each voting on which banks they felt offered the most helpful advice and systems when it came to monitoring and controlling the cash passing through their businesses.
Citi and Deutsche deliver
According to this prestigious set of respondents, Citi remains a firm favourite for cash management services in several categories. The US bank’s breadth of coverage ensures that it retains its appeal in large-sized Asian corporates and in small-sized financial institutions. It also steals the limelight away from BNY Mellon in the medium- and large-sized financial institution categories.
Citi boasts enormous regional coverage, from small to global companies. It possesses over 200 million customer accounts globally, and presence in 160 countries.
“Because of the sheer presence we have, we cover financial institutions all over the world and because of the connectivity we have, we actually make the network live for us and are able to leverage this for our clients,” declares Munir Nanji, regional head for bank services group Asia Pacific at Citi. “We have one of the highest book transfer rates globally due to our global network, which means that a payment that is leaving Asia to anywhere else in the world, we are able to ensure that the timing of the payment gets to the recipient much faster and we are able to control the end-to-end flow.”
Deutsche Bank is the other firm to gain admiration from corporate and bank respondents across Asia. The German bank deliberately concentrates on servicing regional multinational companies and financial institutions. It was judged the best global service provider by small- and medium-sized companies and second best in the large corporates and small financial institutions space.
“We have a major footprint in the region, we have people on the ground in 14 countries across Asia,” says John Ball, global head of sales for cash management financial institutions at Deutsche Bank. “And as it relates to the cash management space, it’s a business that we have been extremely dedicated to for a long period of time.”
Both banks need to remain at the top of their game, because competition is mounting. J.P. Morgan has had some bad trading losses of late but the US bank remains a global force. It is gradually inching its way up the charts as its investment in its Asian resources is starting to show, rising to third and second, respectively, for cash management services to small- and medium-sized financial institutions this year from fourth and third in 2011.
Counterparty risk
The need for Asia’s companies to work with top service cash management partners is a focus almost every day in the news.
The worsening European crisis continues to raise uncertainties in the financial markets. That is beginning to raise the same sort of counterparty concerns that so plagued the markets in the aftermath of the global financial crisis of 2008.
The most recent flurry of bank credit rating downgrades by Moody’s on 15 banking titans in June reinforces why both corporates and financial institutions should stay alert. Credit Suisse faced the largest downgrade, with its rating being slashed three notches from ‘Aa1’ to ‘A1’ by Moody’s. Four other firms were downgraded by one notch and 10 lenders had their ratings dropped two levels.
The increasing weakness of banks is certainly on the minds of voters in this year’s poll.
“The creditworthiness of local banks is a concern,” says a corporate treasurer of an Australian-based oil and gas exploration company. “We have a few banks on our portfolio, so we are ready to change counterparties if things get worse.”
Some corporations are now turning to the CAMEL Rating System to effectively manage their counterparty risk. The framework is an international bank-rating system where bank supervisory authorities rate financial institutions according to five factors: capital adequacy, asset quality, management quality, earnings and liquidity.
Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. These ratings are not publicly available.
“ The more sophisticated corporates are looking at a combination of criteria,” says Swee Siong Lee, global head of global corporate products, transaction banking at Standard Chartered. “When they look at banks, especially when they’re placing huge amount of deposits, they would need some sort of matrix to guide them on how much to cap their limits in each of the banks.”
Bank counterparties have scrambled to reduce exposure since the review from the rating agency began and could push for billions of dollars in additional collateral. And while this could further exacerbate liquidity conditions in the banking world, some financial institutions on the other hand remain optimistic.
“When things are volatile, you are very concerned about ensuring you have the credit support and partnership that you can count on,” says Citi’s Nanji. “The past 12 months have been a testimony of this where we have found that Asian banks have come to us thanks to the European situation because they have valued our trusted partnership and have realised that if you think about the euros, for example, you can work with a global bank like ourselves who has a deep footprint in the region.”
Liquidity appeals
Asia remains somewhat resilient compared to its European and American peers, but the fragility of the world’s economy is likely to mean that good liquidity management remains of particular important to clients.
While many companies have historically managed their business in a very structured manner, most used to manage their cash almost on an ad hoc basis, relying on instinct when it came to forecasting their cash needs. The weaknesses of such a primitive forecasting method are obvious, and many companies are evolving their capabilities here.
“Given the market volatility, corporates remain prudent and conservative with their investments with their primary focus on safety of their assets. They are also becoming very surgical in their approach to forecasting so that they can make their cash work harder by being better prepared for when things go wrong,” says Sanjeev Chatrath, regional head of client sales management for Asia Pacific at Citi. “This is a big shift from managing their cash ‘by chance’ to being prepared and managing their cash ‘for chance’.”
This is where efficient management of liquidity comes into play. Taking advantage of this can offer a differentiator in an industry that can look highly commoditised.
“The need to have access to cash and visibility has become ever-critical for near real time management of counter party exposures,” says Mahesh Kini, regional head of cash management for Asia Pacific at Deutsche Bank. “Under a dynamic economic environment, wherein overnight changes to policies, credit ratings and liquidity positions could lead to a need for corporates to be able to move their liquidity around the region or world.”
Cash pooling and cash concentration structures have existed for a long time, and their prevalence helps clients to concentrate and optimise cash in a country. However, there are some jurisdictions in Asia – primarily emerging markets – that still restrict corporates from efficiently moving cash around, which essentially impairs their liquidity.
“One would be restrictions on the ability to transfer. Some governments are insisting that we hold funds with local banks,” says the Australian-based treasurer. “That means that if we have earnings in those banks, in the future they could potentially restrict transfers from that account by using regulations. That limits our freedom.”
Rise of the renminbi
Ask any bank or cash management user which part of the regional financial market they are keeping the closest eye on and the answer is almost uniform: the renminbi.
The emergence of the Chinese currency into the international arena is without question one of the most exciting developments in Asia’s cash management arena in recent years.
While Hong Kong’s offshore renminbi hub continues to dominate, the potential rise of other centres – namely London, Singapore and even Taiwan – will continue to spur speculation and talk.
This will help the liquidity of the currency outside of China’s borders continue to mount as more companies accept renminbi payments for their trades, and as increasing numbers of bank depositors put money into their renminbi accounts.
“What is interesting about the renminbi is the growth of it. Because we have got clients around the world, they’re coming to us and asking us to help them with adopting renminbi as a currency,” says Citi’s Nanji. “We also have a lot of central banks around the world who are holding renminbi as a reserve currency. We can facilitate such transactions and guide our customers as they consider transacting in renminbi.”
It’s easy to forget in the excitement surrounding the internationalisation of the Chinese currency that its presence in trade settlement is still miniscule. According to Swift, the market share of the renminbi in transaction settlement accounted for merely 0.4% of this year’s global flows as of May.
Improving this volume will in part depend on expanding the selection of renminbi-denominated investment products available. Many corporates once accepted renminbi payment because they felt the currency would appreciate, but with this no longer likely they now want higher-yielding products if they are to continue adding exposure to the currency. That’s not easy in a declining interest rate environment.
“In the past five years the potential for renminbi to appreciate is quite high, so we benefited from it,” declares Raymond Chiu, executive director of Hong Kong-listed NewOcean Energy Holdings. “I don’t see any good way that we can make use of our receivables in the present situation. One of my concerns is that the central bank will reduce the deposit rates further.”
Despite that, the internationalisation of the renminbi is heading in the right direction and cash management will have a bigger role to play as China continues to gradually liberalise its capital accounts.
“The Simplified RMB Cross-Border Payment (SRCP) pilot scheme is a big move from the People’s Bank of China,” says Kini. “Deutsche Bank was the first bank to complete a cross-border renminbi payment under the scheme, which facilitates the movement of trade-related renminbi from Shanghai to international financial centres like Hong Kong without the need for documentation.”
Such policy relaxations will make Asia’s thriving trade and cash management industries an increasingly competitive place, despite the overall volatility in the market.
With Asia’s economies providing some of the few bastions of economic growth, competition to service the cash management needs of regional corporates and banks is only going to intensify. The will put pressure on all participants, most especially this year’s winners Citi and Deutsche but nobody should be tempted to cut corners.
As recent months have revealed, bank credibility takes years to build, and days to destroy.