Calm amid the storm

In geological terms, an aftershock is a smaller tremor that happens a short period after an earthquake has struck. Every so often, however, the aftershock is bigger than the original earthquake and, as a result, the original earthquake has to be renamed the foreshock.

The world’s financial system in 2008 was characterised by a series of foreshocks. Just when investors thought they had been hit by the biggest financial tsunami of modern times, another wave arrived that was even bigger. After the collapse in September of Lehman ­Brothers, one of Wall Street’s oldest and most revered institutions, one shell-shocked market participant told a correspondent: “Every time we think we’ve seen the light at the end of the tunnel, it just turns out to be another train coming.” But Lehman Brothers’ collapse was just the beginning. It set in motion a series of events that eventually led to the nationalisation, or part-nationalisation, of some of the world’s most powerful financial institutions. Thinking the unthinkable has become an everyday occurrence for financial forecasters.

The world ahead

Looking ahead into 2009, it is hard to find any banker with even a shred of optimism. Those that are still employed are too busy trying to keep their banks solvent, let alone worry about what the future holds.

There is one breed of banker, however, for which the credit crisis has lent a new ­lustre. The transaction services division of banks was previously the sector’s dowdy Cinderella, managing the housekeeping of the world’s banks and studiously ignored by its more glamorous stepsisters in the capital markets divisions. But now the tables have turned. As financial markets ground to a shuddering halt in the third quarter of 2008, so the importance to companies and financial institutions alike of managing their working capital grew and grew. Cash has become king, and the cash management divisions of banks are finally going to the proverbial ball.

“I have worked in transaction banking for quite a long time now and two or three years ago, when I talked to my friends about what I did, they would yawn and walk away. Now, they find it extremely fascinating,” says Paul Camp, Deutsche Bank’s head of cash management for financial institutions.

The scramble for cash

This renewed fascination has been driven by desperation. The world’s trade arteries have dried up. Inventories are piling up on docksides and ships lie idle in ports. The world’s banks might be facing their biggest crisis since the 1930s, but corporate treasurers need their services now more than ever.

“Banks now recognise [transaction banking] as an opportunity, just as corporate treasurers recognise transaction banking as a need,” says Andrew Long, HSBC’s head of global transaction banking. “You might have a very profitable business but if you’re not generating cash then you’re going to go bust.”

Mr Long says overdrafts and trade lines have been cut, which will lead to a further acceleration of the importance of cash in 2009. Companies will be desperately looking for ways of getting hold of cash, either by delaying payments or by accelerating ­collections.

For Alan Verschoyle-King, head of European payments and trade services at Bank of New York Mellon, it is at times like these that transaction banking shows its true colours. “In some ways it is countercyclical,” he says. “So in a difficult economic climate such as this one, it really comes into its own because it is low risk and balance sheet friendly.” He adds, however, that the real change in 2009 will be from the client perspective: “These days the focus is on ­relationships.”

Francesco Vanni d’Archirafi, global head of treasury and trade solutions at Citi, agrees. “The events of this year made us even more relevant to our clients as they asked us to help them unlock the liquidity within their operations and help them mitigate risks,” he says. For him, 2009 will be all about staying close to his clients and helping them improve control over their working capital.

It is a common story across the industry. Client relationships will be at a premium in 2009 as the cash management landscape gets increasingly competitive. “That level of intense competition will continue,” says Brian Stevenson, head of global transaction banking at the now government controlled Royal Bank of Scotland. “Our clients will be increasingly careful about whom they choose for their providers of payments support across the world because there are obviously risks with it and people have become more risk aware.”

Mr Stevenson, who will be busy integrating the transaction banking division of ABN AMRO in 2009, says it is important to “stick to the knitting”. “If we continue to do the basics well, I think that will stand us in good stead for 2009,” he says.

Banker or civil servant?

The fate of RBS in 2008 could come to represent the nadir of the credit crisis in the UK. The bank, alongside HBOS and Lloyds TSB, was nationalised in November as part of UK prime minister Gordon Brown’s attempts to save the industry. There is no one who could have forecast that some of the leading lights of UK banking, the drivers of a decade- worth of national growth, would end up in government hands by the last quarter of 2008. The entire banking landscape has changed, but how will this affect the day-to-day running of RBS?

For Mr Stevenson, it is business as usual in 2009. “The government has said it doesn’t intend to get involved,” he says. “There will be political pressure, but you have to draw a line between running and managing a bank and pressure groups that are brought to bear on the bank. There has always been press attention on what the banks do. I just think it is heightened because of government ownership. We just have to get better at managing that.”

Looking ahead into 2009, what impact will a part-nationalised bank sector have on the industry as a whole, particularly on client attitudes? HSBC’s Mr Long believes that clients will be sceptical. “We have customers coming to us recognising that the banks ­taking government money are now well ­capitalised again, but they remain unclear as to whether that position might continue because there might be losses hidden away in the businesses that have been capitalised,” he says.

The other concern that clients might have, according to Mr Long, is how much government direction will be given to those banks in terms of handling commercial business. “That level of uncertainty is pushing them towards thinking about their level of involvement with non-government involved banks,” he says.

Whether part-government-owned or not, the priority for banks in 2009 will be rebuilding their reputations. According to Mr Verschoyle-King, the most important development in what will continue to be a difficult market will be demonstrating both trustworthiness and creditworthiness. “We must now all work to prove that the strength, longevity and focus are actually there in practice,” he says.

Treasurers in the limelight

The relationship between corporate treasurers and the banks that finance them will take centre stage in 2009, according to most transaction banking chiefs whom The Banker spoke to for this review. As working capital dries up and credit becomes harder to obtain, the spotlight will fall on treasurers to keep their operations afloat. “Suddenly treasurers are becoming much more important in the minds of their chief executives,” says Mr Long. “They are being heavily involved in the risk management of their companies because, frankly, cash and foreign exchange are crucial to the survival of the corporation.”

Developing a coherent foreign exchange strategy will be critical to many companies’ survival in 2009, as currencies across the world seesaw against one another. Karen Fawcett is group head of transaction banking services at Standard Chartered Bank in Singapore. She believes that risk management is the key in these volatile times. “The first priority for our clients is to understand their risk tolerance and to help them reduce their return volatility by managing and hedging their exposures appropriately,” she says.

But all this will come at a price, according to Mr Long. “The old [foreign exchange] instruments are still there, but the question is how much are you prepared to pay? If volatility goes up the cost of the option goes up,” he says.

Staying solvent in 2009 will not just be about managing foreign exchange. Citi’s Mr Vanni d’Archirafi is telling his clients to reduce their working capital and speed up cash conversion cycles by focusing externally on their supply chain and internally on their cash management and treasury processes. “By adopting best-in-class practices, a ­typical multinational can reduce its working capital financing requirement by up to 30%, which could boost earnings per share by 2% to 3%,” he says.

Regulatory burden

Credit crunch or no credit crunch, one of the biggest issues for banks next year will be the huge burden of extra regulation they face, in particular in Europe. It is an issue that divides bankers. Some take a longer term view and believe that edicts such as the Single European Payments Area (Sepa), the Payment Services Directive and Faster Payments will eventually create a more efficient industry that will be profitable both for banks and their customers.

Sceptics, on the other hand, believe that all this extra regulation is costing banks millions of dollars in unnecessary expenditure in order to fulfil the vague fantasies of politicians and bureaucrats. Some bankers have gone so far as to suggest that the dramatic government bail-outs of banks in 2008 could have been avoided if those banks had not had to spend so much of their capital on incorporating new legislation. This view, however, is extreme. Most bankers surveyed for this article took a more balanced approach. What did become clear, however, is that Sepa is an area of particular concern.

Launched to great fanfare in January 2008, Sepa was supposed to revolutionise banking in Europe by allowing banks and their customers to transfer funds seamlessly across the continent. The reality of Sepa in 2008, however, was one of procrastination and apathy. “From the standpoint of an observer or a corporate treasurer the ongoing uncertainty surrounding this and other issues will not be inspiring confidence in the Sepa project,” says Werner Steinmüller, head of global transaction banking for Deutsche Bank.

“What we are seeing in the market is that banks are trying to avoid huge investments and are therefore using conversion services from legacy formats into the new Sepa formats,” he says. For Mr Steinmüller, the critical issue in 2009 will be encouraging adoption of the new standards. “The case needs to be made to corporate audiences that have sometimes been lukewarm towards the initiative,” he says. “Tying up any outstanding regulatory issues – such as establishing a firm end date for compliance – will also be crucial.”

Setting an end date for banks adherence to Sepa regulations is a perennial topic of debate. Before an end date can be set, however, somebody needs to decide which body or government has responsibility for setting that end date in the first place. RBS’s Mr Stevenson believes that Sepa is a realistic project, but is sceptical on the timing. “As to whether the timelines are realistic I can’t really predict because of all the wrangling that is still going on among the members of Europe,” he adds.

HSBC’s Mr Long is equally unconvinced. “Some of the transaction banks invested heavily in systems to handle Sepa transactions but to date volumes have been disappointingly low,” he says. “I think there will be pressure for an end date [because] you can’t just keep putting off the conversion. It is still up in the air to say it will be signed, sealed and delivered by the end of 2009.”

Mending fences

For most banks, incorporating new legislation to improve the efficiency of global banking has become an afterthought amid a more general financial meltdown. Similarly, investment in new technology, deemed so critical just a year ago, has taken second place to basic survival. Trust between banks, and between banks and their clients, has been dealt a severe blow and once glittering reputations lie in tatters.

So how can banks go about mending their tarnished images and win back trust? For Mr Stevenson, the crisis in financial markets has had little impact on his client relationships. “I have not seen a breakdown in trust in the transaction banking business. That is not visible,” he says. “If you look at what has happened in trade, I don’t think ships are lying idle because they can’t get finance for cargoes, it is because of the general global downturn.”

Mr Long says that repairing broken reputations will be the last thing on bankers’ minds this year. Staying in business will be top of the agenda. “Most of the banks are just desperately trying to survive at the moment. Things are coming out of the woodwork... all banks will see their commercial lending books struggling and on the funds side, the level of redemptions is accelerating, not declining,” he says.

What is abundantly clear for 2009 is that despite the crippled reputation of banks and bankers in the public’s eyes, there are some parts of the business that have not only survived with reputation intact, but are needed now, more than ever. The credit crisis has reinforced the value of transaction banking for any bank, according to Mr Long. “If you take away a company’s ability to transact, then their business is dead,” he says.

INDUSTRY LEADERS LOOK AHEAD:

	“2009 is going to be just as long and hard as 2008. Therefore if that volatility could damage your business, take whatever steps you can to manage that volatility or reduce it.”Brian Stevenson, RBS
	“There will be a reversion to the more traditional style of banking: there will be less leverage, there will be less financial risk and that will benefit the more conservative banks as people see the industry reverting to type.”Andrew Long, HSBC
	“As everybody ­battens down their hatches to weather the financial storm, focusing on mutual value will be crucial.”Alan Verschoyle-King, Bank of New York Mellon
	“We expect the resurgence in transaction banking services to continue as other sources of liquidity come under pressure and clients pay more attention to actively managing their liquidity and working capital position.”Werner Steinmüller, Deutsche Bank
	“With continued vigilance and discipline, and by sharpening our focus on our clients and on our core markets, there will be opportunities for us to continue our growth in the coming year.”Karen Fawcett, Standard Chartered Bank
	“2009 will be about staying close and relevant to our clients... helping them improve their control over their working capital [and] become more efficient as they manage the economic ­downturn.” Francesco Vanni d’Archirafi, Citi