In the current environment there are many challenges for a business looking to expand. Many companies settle for survival, others look for opportunities to grow. As companies seek new markets, products, channels and ways of operating, what is influencing their decisions and what are the opportunities for Treasurers in Europe? HSBC asks these questions of Jeroen Bakhuizen, Head of International Subsidiary Banking, Europe.
How is Europe, as a centre of trade, faring in comparison to other regions in terms of treasury activity?
One of the key differences between Europe and other regions is the existence of the eurozone. It is an advantage for many companies looking to rationalise their treasury operations. US companies that have been active in Europe for a long time tend to have a sophisticated organisational setup; almost all the large ones have regional treasury centres (RTCs) with regional decision-makers located in Europe. Because of the eurozone and the sophisticated banking systems on offer they have been able to centralise and rationalise across the whole region. Many large companies – of US$20bn-plus turnover – have been doing this for some time. With the banking and economic infrastructure in Europe making it relatively easy for companies to adopt a regional treasury model, a similar trend is now seen with companies of US$500mn to US$5bn revenue undertaking the same exercise.
The key RTC locations, in no particular order, are the UK, Netherlands, Switzerland and Ireland, with Belgium and Luxembourg also now commonly seen as locations for these hubs. With more discussion on ‘substance’ on the agenda as part of the OECD’s BEPS tax initiative, treasury locations are having to move to physical operating locations, which clearly makes the choice of site highly important. The transport links available in these locations, particularly those on the continent, is an added strength which they offer.
While Europe does not have double-digit GDP growth, it is stable and is clearly an advantageous region in which to rationalise business and look for synergies. This exists for Asia and Latin America too, but achieving a truly regional set-up becomes more complex in these regions because of the numerous currencies used, whereas European flows are mainly covered by US dollar, British pound, euro and, to a lesser extent, Swiss franc, Turkish lira and Polish zloty.
With the ongoing eurozone difficulties, demographic changes and Brexit, how will such events affect appetite for continued foreign direct investment (FDI)?
Given how swiftly the region stabilised post the Greek financial crisis, we remain confident that appetite for FDI into Europe will be maintained. Pre-UK referendum and over the last few months post the Brexit decision, we have seen a “wait-and-see” approach from Global Treasurers seeking to invest in the UK but have not seen any major change in the behaviours of corporates investing in the rest of the region. In the European heartlands, little changes from a business perspective.
The important thing to do is to balance current European events with those happening in other regions. Uncertainty and rising production costs in China, for instance, saw automotive firms moving parts of their business back into Central and Eastern Europe (CEE). Remember, it is truly a global economy now and although there are difficulties in Europe, there are also challenges in other regions.
What is currently driving the actions and expectations of those engaged in FDI in Europe?
FDI in Europe continues to thrive, largely because of the low interest-rate environment. Compared to Q4 2015 FDI may be slightly down but I still see significant M&A activity and other investments from right across the globe. We are seeing strong investment from the US, China and India into Europe. This is a developing trend as corporates are taking a long-term perspective, seeing Europe as a safe investment. There is plenty of anecdotal evidence of companies moving production back into Europe. I mentioned earlier the automotive sector’s continued move into CEE but in other sectors too, production is shifting back. The reason for this shift tends to be the rising cost of production in Asia as well as a conscious decision from countries such as China to diversify away from being purely the ‘factory of the world’. FDI into Europe really does stem from multiple locations though, with companies from all over the world making huge inward investments. It cannot be said with any conviction if this trend is secure in the long term. But for a corporate finding it difficult to put its own assets to work, if it sees a low interest-rate environment, already has some assets on its radar, and is taking a long-term view, European FDI is going to present an opportunity to put those assets to work.
Companies with established overseas operations know that visibility and control over cash is vital at both group and subsidiary level. In Europe, how are treasurers satisfying these aims?
Five or more years ago this question would have been all about cash management, certainly for the major multinationals. Treasurers would optimise their bank account structures, rationalising the number of bank accounts and banks to just a few core relationships across the region. This trend continues, trickling down to smaller multinationals. But now sophisticated regional treasurers are taking up the next wave of rationalisation and optimisation. This time it is more around trade and trade finance. They will be requiring more sophisticated and co-ordinated trade solutions, including structured deals and regional receivables finance solutions, with the objective of optimising their balance sheet and bank-related fees and expenses.
In fact, in the RTC space, from a starting point of pure cash management, we have seen the function evolve more into balance sheet optimisation and trade finance-related rationalisation. And we are now also seeing more companies moving onto foreign exchange (FX) platforms, allowing them to bid out all their plain vanilla FX deals. As a bank we have to be able to meet these growing needs head-on.
Given these changes then, and the complexity of the European economic, cultural and political landscape, what should a treasurer expect from his or her banking partners in terms of assisting growth, both from within the region and externally?
There are a number of key components that a bank needs to be able to meet customer needs and provide a competitive service offering in Europe. One of the most vital elements is its systems. When competing with other global banks and regional banks, it is only possible to get
an entry ticket to kick-start discussions with prospective clients and maintain existing relationships if you can prove
that your systems are best-in-class.
With HSBCnet, our global e-banking platform and our global liquidity engine, for instance, we prove time and again that we are one of the major players. We continue to invest in HSBCnet, not only bringing the platform to mobile devices and adding a host of essential features around this but also ensuring it is more than just a cash management tool: it is a portal into a whole range of HSBC products and services for regional treasurers, including core functionality for FX and trade.
A bank must also exhibit its competitive edge in other ways. We are very serious about our global and regional presence, especially in the current banking environment where true global players are few and far between. What sets us apart is the strength of our local presence and the way in which this presence is increasingly co-ordinated right across the bank. Our international subsidiary banking business has evolved into a harmonised operation, with the same set-up, systems, philosophy, look and feel in every country where our multinational customers are banking
with us in. The experience will be the same at any level, wherever that operation may be. This means that while we are local, we really are able to present the whole region to the client.
Another competitive edge that we have at HSBC is our Regional Relationship Manager proposition, which assigns a dedicated regional contact point in the location of the client’s RTC. This gives our clients one point of contact – one trusted advisor – who remains the same throughout. And instead of waiting for the client to come to us and ask for a solution, we do it the other way around. We let the client know what is at the cutting edge, proposing new ideas as they arise. For HSBC, assisting the growth of clients is all about building long-term relationships.