Get the right banking partner

In the fast-moving world of corporate treasury, there are two key issues that underpin strategic decision-making – understanding what products can help you and getting the timing right.

Treasurers need to be constantly aware of developing trends and issues in areas such as managing foreign exchange (FX) risk, fixing interest rates, raising capital and new business opportunities; whether that’s taking out fresh borrowing, fixing rates for overseas transactions or identifying the right time to make an acquisition.

Identifying the optimal timing for these actions, combined with the application of the right products, can lead directly to greater bottom-line profits, whereas the wrong move could have a devastating effect on the organisation.

In the current economic climate, businesses are facing a more settled environment in some areas than they have seen for some time. This could be advantageous in terms of improving corporate balance sheets and taking on debt or hedges. But it can also introduce risk, particularly the danger of complacency and of missing out on potentially advantageous conditions.

FX is a key area where there is a risk of complacency, particularly as importers enjoy more stable conditions and a stronger pound. “We’ve had six months of relatively steady appreciation in sterling, resulting in a great environment for UK importers,” says Jon Pryor, head of FX dealing at Investec.

“Not only is the pound going in their favour, meaning that the goods they’re importing are cheaper, but it’s being done in an orderly fashion. This allows the standard UK treasurer to sit down and forecast what they need. However, the danger here is that UK treasurers switch off and potentially leave their requirements to the spot market in the belief that sterling will continue to strengthen.”

Managing FX risk requires a careful blend of product selection and market timing. Hedging instruments can allow organisations to take advantage of further growth while protecting budgets, giving a greater degree of certainty.

 Banking partners, who take a client-based approach and the time to understand individual requirements, can ensure organisations take advantage of favourable financial conditions

A number of recent stories in the press highlight how UK companies can be badly affected by adverse FX movements. These stories underline the benefit of working with a dealer who intimately understands their client’s business and will initiate conversations whenever the market moves, as opposed to once or twice a year – something Investec’s research has shown to be typical.

Getting the timing right is particularly important when it comes to interest rates, says Andrew Lillywhite, deputy head of corporate and institutional treasury at Investec. “We are operating in a pretty benign interest rate environment, and there is a risk that treasurers become complacent and don’t really think about managing that risk in the same way they may have done six or seven years ago,” he says. “We’ve seen five-year interest rate points move up over 100 basis points in the market in the last 12 months.”

The message is that corporate treasurers need to fix the roof while the sun is shining, he says, either by fixing rates on loans or other borrowing or investigating products that can offer a flexible degree of protection from rising rates before market expectations change even further.

“Buying that disaster protection once rates have started to move could be much more expensive than it is today,” warns Mr Lillywhite. “At the moment, the actions a corporate treasurer may take to protect his or her business over the medium term remain quite attractively priced. Engaging with a proactive banking partner, who can understand their business, may provide a slight strategic advantage.”

When it comes to cash deposits, organisations have had to contend with years of historic lows, but there’s also a risk that those organisations not looking to spend reserves miss out on better rates through medium-term fixes in the expectation of rate rises.

“The markets suggest that we’re on the cusp of a potential rate rise cycle, but we would encourage clients to look at this with a degree of caution,” says Chris Huddleston, head of money markets at Investec. “An increase in base rates doesn’t necessarily translate into an increase in rates for client money as many banks have significant excess liquidity.

“We would typically get to know a client’s requirements and motivation, and show them ideas and products that will meet their criteria. It’s about allowing them to make an informed decision and ensuring they’re aware of alternative products which may give them a degree of upside versus what they’re currently earning.”

Raising capital is also likely to be on the agenda for many organisations, with conditions currently highly favourable. The first quarter of this year saw 76 flotations in London, generating more than £2.2 billion in funding, says Andrew Pinder, head of corporate finance at Investec. Buoyant stock markets are likely to continue to see both initial public offerings (IPOs) and secondary rights issues remain attractive in the coming months.

In addition, mergers and acquisitions are back on the corporate agenda, both as a means of growing businesses and disposing of portfolio companies and non-core assets. “The gradual opening of the world’s $2.8 trillion-worth of corporate war chests has resulted in $1 trillion in takeovers announced so far this year, with the UK seeing offers across the spectrum,” says Mr Pinder.

With all these aspects, timing is crucial, and organisations need to know they are working with a banking partner who understands their needs and will proactively discuss their options and assess the best time at which to act.

Banking partners, who take both a client-based approach and the time to understand a business’s individual requirements, can help organisations stay on top of these issues, ensuring they are in a position to take advantage of favourable financial conditions. Those businesses whose banks rarely get in touch should question whether that level of customer service really helps them meet these requirements. If not, then they should consider engaging with a bank that does.