Global cash management trends
JP Morgan has released the latest 2011 global liquidity survey. See it here http://www.treasurers.org/node/7564
Here is my take on the headline points…
- The appetite for yield is returning. I sense we have moved from a focus on just staying in business back to one of return on cash. Since 2008, many companies have just been happy to actually have spare cash to earn a return in the first place, as I am sure are their shareholders. Now that period of grace is over the shareholders and management teams are returning to getting the best returns – 2 reasons I think (1) shareholders either want their money back or a decent return (2) margins are still tight so a little more profit in the group is most welcome to prop up trading. And the banks are responding with better rates, per my recent blog!
- Liquidity is still key. Linked to the above, liquidity (i.e. getting your cash back quickly) remains important and taking risks on (1) Credit risk of the deposit taker and (2) longer term deposits are clearly the winning strategies right now. For me, I think (2) is the better lever – i.e. chose a good credit risk bank and just give them the cash for longer. I also suspect there is an FX element at play here for most treasurers since for example I can earn 6% on A$ in Australia versus 2% on GBP in UK. 6% is really tempting, but I ultimately want GBP so I need to find the best of all worlds – keep cash in A$ with a good credit risk bank AND make it a longer term deposit AND take an A$/GBP option to make sure I get the GBP principle back. Banks need to be pushing FX right now for this very reason, which I blogged about back in 2011. You will just have to find the courage to spend the premium now!
- Risk remains in focus. Counterparty risk (i.e. the risk your deposit taking bank goes bust) is everything and has finally overtaken being entertained at Wimbledon by the bank as a key criteria for deposit taker selection (relationship management). Too big to fail? Maybe not. Multi banking is surely on the increase as treasurers build a portfolio of deposit takers to provide a portfolio of returns. BUT, without a dictated policy from the Board risk taking will remain common. Putting all your eggs in one basket will remain a temptation for many when there is no strict governance. A balanced portfolio is a great idea but when it dilutes my RBS deposit return of 2% down to 0.5% overall it ain’t so pretty – on a £100m of cash that’s £1.5m less pa and I can run my whole treasury department on that delta! Isolating the treasury department from such operational (trading profit) pressures seems essential as is ever true of FX control.
- Banking relationships have increased further. No real surprise I guess as internationalisation of business (for success) grows and on the cash side the drive to reduce credit risk concentration by multi-banking increases. I do expect that part of the reason is the desire of treasurers to expand their friendly banking relationships just in case the world goes really mad (GFC2.0) - if you have 5 solid banking relationships then the chances of getting that urgent facility in a time of trouble is surely increased, right?And never say never. OK, the desire to grab higher returns is also probably expanding the relationships as well – it did for us.
- Cash flow forecasting is not the priority it once was. Yikes! If cashflow forecasting was ever a priority then it surely still should be now or it should have become so. The ‘survivors’ that are doing well will be sitting on cash piles, loathe to return it to shareholders just in case, happy in the knowledge that with so much cash the painstaking process of cash forecasting can take a backseat for now – a big buffer lets you off the hook somewhat. I strongly suspect it has ‘fallen in importance’ not because it isn’t important but because you can get away without forecasting when you ‘cannot run out of cash’ because of a big buffer. I wonder how many times in reality treasurers have to break deposit terms to release cash because there is an unexpected demand in the business, better keep that quiet! This survey result could spell doom for many of the companies listed as respondents.
- Regulatory change is not yet a significant concern. Certainly seems to be having little impact if any on the management of other people’s cash – the FSA continues to fine businesses large and small for ignoring the client money rules. My personal opinion is that client money control is a little like speeding. The rules have always existed but people still speed and run the risk of being caught. Enforcement cameras came on the scene and people became just a little more careful in certain areas. The FSA is finding it hard, if not impossible, to get companies to sit up and listen to take this seriously. The now famous ‘Dear CEO’ letter seems to have found the same home as most ‘Dear CEO’ letters arriving at a business, even if it did have the FSA’s name on it. How about a ‘Dear FSA’ letter from the CEO that says ‘Dear FSA, if my business hasn’t followed the rules then I will personally pay a fine (and it will be illegal for my business to reimburse me)’. Isn’t that how pension trustees have to live…
All interesting stuff and useful background of course.
As far as cash is concerned, a brave company might of course just return surplus cash to shareholders through a dividend or buy back – surely that’s the best return for the real stakeholders in the business.
