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Tuesday, 16th September 2025 |
| Treasury outsourcing is here to stay |
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| ABN Amro’s recent withdrawal in Dublin from the treasury outsourcing market raises questions about this service area, writes Pat Leavy. However, he adds that empirical evidence suggests that there is a steady flow of new projects at least on a par with recent years, and that there is still latent demand for this capability which will increase as the concept becomes more readily established over time. |
This article looks at the current trends in corporate treasury in relation to some of the core treasury management activities, including cash and liquidity management, funding, cash investments, treasury organisation and infrastructure. However, before looking at these items in particular, it is important to understand the strategic context within which these trends are emerging.
Strategic dynamics
The dynamics of strategic corporate treasury decisions fall into three categories – risk, return and environmental factors. While there is nothing new about this, the nature of each of these items has changed significantly in recent years.
The concept and understanding of RISK in corporate treasury is moving on from isolated concerns such as currency, credit, interest rate or liquidity risks to a broader appreciation of risk on an enterprise wide basis. This change was initially driven within companies by the recognition of the central role that corporate treasury plays in an organisation and the reality that any new project that had a ‘risk' dimension, such as euro changeover and IAS 39, seemed to land on the treasurer’s desk. However, notwithstanding the fact that treasurers have now positioned themselves in this pivotal role, it is external factors that are driving the trend towards enterprise risk management. In particular, the focus on corporate governance, such as obligations under the Combined Code, Sarbane’s Oxley, best practice guidelines in Cadbury, Greenbury, Turnbull et al, acts as a catalyst to drive and improve the management of risk not only in companies that are obligated to comply, but also in private companies that accept these standards. Enterprise risks, including treasury risks, are now a regular board room agenda item.
One of the challenges for corporate treasurers has always been to manage the risk/reward (RETURN) profile of every treasury decision. Generally treasurers adopt a ‘risk averse' stance but this still leaves significant latitude for individual treasury type decisions. While banks continue to tinker around the edges of return with items such as yield enhancing products, pricing schedules, etc., it is the banks’ strategy to focus on total return on capital that will have a large influence on corporate treasury returns going forward. Return on capital infers a move by banks from transactional type banking to relationship banking. Simultaneously, many corporates recognise the strategic importance of bank relationships and consequently are looking to drive their business towards their relationship banks. This parallel migration towards relationship banking is likely to impact on return where the focus for companies will be on acceptable rather than best return. Accordingly, the number of banks that companies do business with is likely to reduce.
Globalisation is the ENVIRONMENTAL dynamic that influences change in corporate treasury most. Globalisation is forcing the pace of international standardisation, and these standards will apply to corporate treasury in Ireland. Current examples include IFRS, and in particular IAS 39, which as a result of its complexity is forcing treasurer’s to analyse and understand the underlying nature of risk in financial derivatives, assets and liabilities in a manner unknown in the past. Revisions in calculating capital adequacy ratios and recommended minimum capital adequacy ratios for international banks under Basle II is likely to impact on the cost of credit for some Irish companies. SEPA (Single European Payments Area), which the European Commission wants to see established by 2010, will change the way in which companies make payments throughout Europe, and likely lead to fewer bank relationships as a result.
Cash & liquidity management
Irish and international companies have taken advantage of the introduction of Euro currency in January 2002 by concentrating and pooling their euro cash and liquidity either domestically or on a cross border basis. Indeed, since 2002 there has been an unprecedented focus by major multinational on improving their cash and liquidity management solutions, especially in the Eurozone. Unfortunately however, not all financial institutions currently facilitate Irish companies with an automatic two-way sweep from Ireland into a cross border cash concentration structure. This limitation needs to be rectified before Irish companies will be able to take advantage of the next wave of liquidity management services to come, in the form of multi-currency cash concentration solutions.
Cash investments
There has been significant effort by banks and the authorities to offer scope for companies to increase returns from surplus cash. This has been evidenced by the proliferation of yield enhancing products such as dual currency accounts and range accruals, the myriad of liquidity funds in the marketplace, the change in the 2003 Finance Act allowing Irish resident institutions issue CDs, the increase in internet banking investment opportunities and new entrants into the domestic Irish market. All of these developments are good news for the Irish company. However, as corporates become more sophisticated in understanding the nature of risk and as the number of relationship banks reduce, it is likely that there will be some consolidation in this arena.
Funding
In recent years there has been much debate about alternative funding sources for corporates such as bond markets and securitisations. However, this is the purview of the few and the majority of Irish companies continue to use bank debt as their main source of funding.
The benign interest rate environment and the increase in the size of bank balance sheets in recent years have resulted in strong appetite by banks to provide debt and strong demand by corporates. The volume of syndicated debt in Europe has almost doubled since 2001 and stands at almost $1 trillion. However, the provision of debt is tempered by the requirement by banks for ancillary business. This has encouraged larger companies to shy away from syndicated loans facilities towards bi-lateral loans to align with a more concentrated bank relationship policy. Much of the increased volume of syndications has resulted from refinancings, producing lower margins and fees. As the euro yield curve remains stubbornly flat, this trend is likely to continue.
Treasury infrastructure
Corporate governance and control, cost pressures and demand for efficiency has seen a high degree of focus on the corporate treasurer’s holy grail of STP (Straight Through Processing). STP is synonymous with control. The aim of many treasurers is to eliminate the need for spreadsheets, multiple data entry and multiple check points, and to facilitate flexible and remote access to information. This objective has been supported by improvements in technology such as online dealing systems, internet electronic banking applications, improved treasury management system (TMS) functionality, ERP interfacing, automatic reconciliation and confirming, the opening of SWIFT membership to corporates through SWIFTNet. While this trend will continue, especially evidenced by the significant commitment by banks to technology spend, the impact of consolidation in the independent TMS market is yet to emerge.
Treasury outsourcing
ABN Amro’s recent withdrawal in Dublin from the treasury outsourcing market, while offering short-term opportunities for the likes of ourselves here at FTI, being the leading independent non-bank managed treasury solutions service provider in the marketplace, does raise questions about this service area. However, empirical evidence suggests that there is a steady flow of new projects at least on a par with recent years, and that there is still latent demand for this capability which will increase as the concept becomes more readily established over time.
Conclusions
The challenge facing corporate treasuries is to remain focused on effectively managing core treasury activities and risks, while at the same time seeking opportunities to achieve strategic objectives by adapting to changes in the risk, return and environmental dynamics of their business |
Pat Leavy is a director in FTI, the treasury management consultants
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