Corporates should centralise payments and risk management capabilities in order to hedge increased pricing, currency and risk volatility, according to speakers at EuroFinance Copenhagen.

Volatility was the key word at this year’s EuroFinance event, with speakers listing the numerous sources of unpredictability that will affect treasury and cash management in the next few months. Amrita Sen, chief oil analyst at Energy Aspects, explained that oil prices could spike dramatically as early as 2017, as even OPEC output is expected to drop. “Watch out for supply everywhere in the world. Come 2017, prices can shoot up to around US$90 a barrel again,” she warned.

Eric Burroughs, editor and managing analyst at Reuters Buzz, presented all the different reasons why the value of the euro is likely to go down in coming months: divergent Fed and European Central Bank policies on interest rates; the beginning of a strong dollar phase; and pressure on China’s currency reserves – leading him to advise corporate treasurers to “get creative to hedge their currency risk”.

Other speakers mentioned China’s structural reforms, needed to improve the efficiency of state-owned enterprises in particular, as a challenge for treasurers trying to understand already complex regulations. New regulatory requirements, by putting pressure on bank liquidity, are also challenging what used to be stable relationships with banks. According to Dan Blumen, a consultant at Treasury Alliance Group, recent examples of banks retreating from global transaction services are likely to become recurrent.

One thing that could help corporates deal with this level of uncertainty is centralisation. According to Sebastian di Paola, a partner at PwC, companies should centralise their commodity risk management functions in order to cope with price volatility. They should also invest in tools to measure their exposure to different types of volatility, as well as increase their knowledge on the impact of regulation, to be able to choose the right partners. “There is sometimes a tendency of those who do have the knowledge on regulations to want to keep it for themselves, and adopt a ‘if you can’t convince, then confuse’ strategy, using the confusion as a commercial tool, so treasurers need to get sufficient knowledge to make up their own mind,” he said.

Centralisation can also help companies reach better cost efficiency, by leveraging new platforms such as Faster Payment in the UK, as ACE Software director Alain Falys explained. When in the past they relied on an exclusive relationship with one global bank (which is no longer considered safe with banks’ capital restrictions), by centralising payments they can now have an overview of all the solutions available for each payment – global or regional bank, non-bank, etc – and automate the payment decision according to the desired outcome, such as speed or cost.

Change of strategy following RBS transaction banking exit

Corporates attending the conference were also urged to diversify their banking partners, in case any of them exits from segments or countries as a result of tightened regulations.
RBS’ sudden announcement that it was shutting down its transaction banking services outside of the UK and Ireland at the start of this year has been said to have had massive repercussions for its clients. Speaking at the conference, Shell vice-president of treasury Frances Hinden said the change of banks would represent US$3-6mn in additional costs.
“RBS gave us an enormous shock when they said they would no longer do cash management. It was a major surprise because they had been assuring us frequently that they were ‘here for the long term’ to support us,” she added.

As a result, when Shell ran a request for proposal (RFP) to find a new bank, it took a very different approach: “We asked questions we would have never dreamed of asking before, about the bank’s strategy, number of staff, commitments in countries, profitability of the cash management business, investment plans, technology outlook, etc,” Hinden explained.
The company is also focusing more on platform standardisation and moving away from banks’ proprietary solutions in order to make another potential bank migration smoother.
Jeff van Osta, chairman of Belgium’s association of corporate treasurers (ATEB), hailed Shell for managing to retrieve extensive information from banks during the RFP process, but warned that relationship managers, while answering with integrity, may not be aware of what is decided at board level.

He added that the strategy would not necessarily be applicable for smaller companies, which may not have the same leverage on banks. Therefore, he advised midcaps and small firms to have a contingency plan and diversify their bank partners, pointing out that “there is so much pressure on the financial sector that we never know how they will react”.
Other speakers urged corporates to perform a RAROC (risk-adjusted return on capital) analysis on their banks, the way most banks perform it on corporates. “Basel III is going to rock the sustainability boat. Requirements are incredibly difficult to understand and banks guarantee they are prepared, but I don’t think that’s the case,” said Blumen at Treasury Alliance Group.

He encouraged treasurers not to rely even on long-term banking relationships, but rather to identify a number of banks they could do business with and be prepared for a change.
Evolving bank/corporate relationships were a strong topic at this year’s EuroFinance. Most speakers and delegates agreed on the fact that the traditional banking model was being dramatically challenged by regulation and technology developments, and would never look the same again.

One banker told GTR on the sideline of the event that relationship banking was “dead”, citing platforms such as Mitigram – where banks can bid for corporate’s trade finance business on a case-by-case basis – as the future of banking models.