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© 2015 Citibank, N.A. All rights reserved
Citi Treasury and Trade Solutions | Liquidity Management Services | Treasury Advisory Group
Treasury Priorities 2015: Two Steps Forward, Half Step Back
January 27, 2015
Speakers Michael Guralnick (Moderator) Managing Director, Global Sales Head, Corporate and Public Sector Sales & Global Marketing, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +44 (20) 7986 5012
Based in London, Michael has global responsibility for Citi’s Treasury and Trade Solutions (TTS) Corporate and Public Sector Sales & Global Marketing teams. His principal activity is to lead and direct TTS’ global sales strategies for the bank’s Corporate & Public Sector clients including: new sales origination, cross-sell, and ensuring client satisfaction. The Team’s mission is to develop long-term treasury and working capital management relationships with its clients across their financial and commercial ecosystems leading to a deeper and broader strategic banking partnership. In addition, he is responsible for leading the development of marketing strategy for TTS across all regions, products, and segments.
Ron Chakravarti (Speaker) Managing Director, Global Head, Treasury Advisory, Liquidity Management Services, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +1 212 816 6909 Based in New York, Ron leads a global team responsible for delivering treasury advisory and designing best practice liquidity solutions for Citi’s Treasury and Trade Solutions corporate and institutional clients. His prior experience includes positions in treasury consultancy, transaction banking product management, and corporate banking based in Asia, Europe, and the US.
Declan McGivern (Speaker) Director, Head, EMEA Treasury Advisory, Liquidity Management Services, Treasury and Trade Solutions, Citi Email: [email protected] Tel: +353 1 622 6299
Based in Dublin, Declan is responsible for the delivery of treasury advisory to Citi’s Treasury and Trade Solutions corporate clients, specifically on treasury operations and technology integration. During his seven years with Citi, he has also been responsible for product management of Citi’s Treasury Services Group. His prior experience includes positions in treasury consultancy and as Head of Offshore Risk Management and Group Financial Controller in a major European bank.
1
Backdrop Global
Advanced Economies Emerging Markets US China
Global GDP Outlook Improving…..
…While Currencies and Interest Rates Diverging
2.70% 3.00%
3.40%
0.00%
1.00%
2.00%
3.00%
4.00%
2014 2015F 2016F
1.70%
2.40% 2.40%
0.00%
1.00%
2.00%
3.00%
2014 2015F 2016F
4.10% 3.90% 4.70%
0.00%1.00%2.00%3.00%4.00%5.00%
2014 2015F 2016F
2.40%
3.60% 3.00%
0.00%
1.00%
2.00%
3.00%
4.00%
2014 2015F 2016F
7.40%
6.90% 6.70%
6.00%
6.50%
7.00%
7.50%
2014 2015F 2016F
0.25% 0.29% 0.75%
1.63%
2.38%
3.02%
0.50%
1.16%
0.30% 0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
2014 2015F 2016F 2017F 2018F 2019F
Short Term Interest Rate Outlook (Year End)
USD
EUR
JPY
1.33
1.65
108 1.11
1.48
126
1.00
1.36 137
EUR GBP JPY
2014 2015F 2016F
Projected Appreciation of USD (Year End)
Source: Global Economic Outlook and Strategy, Citi Research, January 2015
2
Drivers
Need for Speed: Real-Time
Treasury Management
Embedding Treasury: Growth in Importance
and Scope
Continued Centralization:
Efficiency and Control
Performance Management: Increasing
Accountability
Risk Management: In the Spotlight
Key Treasury Trends1
Returns Risks Regulations
Key Drivers for Treasury in the 2015 Environment
Source: 1. Citi Treasury Diagnostics, 2014
3 Drivers
Priorities
Returns Risks Regulations
1. Supporting Growth
2. Managing Contingencies
3. Maximizing Technology Return on Investment
Top Priorities in 2015
Drivers
4 Priorities
Managing Growth Supporting Growth Supporting growing business momentum requires Treasuries to implement sophisticated subsidiary funding techniques, ensuring the right amount of liquidity at the right place at the right time.
2015 corporate top-line growth estimates are robust, often with expansion into new segments and geographic markets • Legacy treasury processes and financial
infrastructure may be inadequate to support growth
Transformational M&A actions are increasingly common, with firms using these to reshape businesses • Integration into (or separation from)
established financial and technology infrastructure present urgent project-orientated challenges
• Growth and acquisitions may structurally change currency profiles, sources and uses of funds, and embedded currency risks
Impacts Liquidity Risk
• Terms of trade in new geographies, products, or acquisitions may require more investment in working capital and worsen WCM metrics
Changes Working Capital Investment
• Growth may impact natural hedges previously inherent in supply chains, or give rise to new FX risks in currency and tenor
Shifts Currency Exposures
• Urgent projects added to BAU needs may stretch Treasury capacity. Continuous planning around resourcing and expertise is essential to meeting deliverables
Calls on Treasury Resources
5 Supporting Growth
Optimizing Liquidity Management Evolving commercial and market realities can quickly make legacy liquidity management practices sub-optimal. Corporates should continually reassess opportunities for extension, as well as rationalization of accounts, structures and processes to reduce carrying costs, liquidity risks, and operating risks
More Currencies
More Legal Entities
Changing Commercial
Flows
Changing Local
Regulations
Extend Cash Pools
Rationalize Account
Structures
Assess Advanced Solutions
Alignment of People, Processes and Technology in support of the evolving needs of the corporate growth agenda
6 Supporting Growth
Opportunities: China Deregulation Milestones (2012~2014) Background: To support finance center establishment, China financial reforms were further accelerated after 2012, especially
with the officially launch of China (Shanghai) Pilot Free Trade Zone (“SFTZ”). Both PBOC (China Central Bank) and SAFE (core regulator for FCY) have announced a series of new regulations since 2012.
PBOC New Regulation in 2014
1. RMB cross-border business in SFTZ • Simplification of RMB cross-border settlement • RMB cross-border borrowing • RMB cross-border pooling • RMB cross-border POBO/ROBO and netting • RMB cross-border settlement for E-commerce
2. Release deposit interest rate cap of small FCY in SFTZ (<=USD 3MM)
SAFE New Regulation in 2014
1. FCY pilot program in SFTZ • Simplification of FCY cross-border settlement • FCY cross-border pooling • FCY cross-border POBO/ROBO and netting • Capital willingness settlement
2. FCY pilot program will be promoted nationwide • FCY cross-border pooling, POBO/ROBO and netting
Jan 2012 Jul 2012
SAFE released the regulation to simplify FCY XB goods settlement
SAFE approved 1st batch of pilot clients.
Release RMB financial guarantee quota
Jan 2013 Jul 2013 Jun 2014
•Simplify RMB cross-border settlement nationwide. •Allow RMB cross-border borrowing nationwide • Release cross-border RMB company guarantees
Simplify FCY settlement under trade and service
Establishment of SFTZ
Release RMB loan interest rate floor
Jan 2014 Apr 2014 Sep 2013
Expand the range of deposit /loan floating rate
• Allow RMB cross-border business in SFTZ
Release deposit interest rate cap of small FCY (USD 3MM or less) in SFTZ
Allow FCY pilot program in SFTZ
Pilot cities expand to nationwide
Approve 3rd batch of pilot clients
Simplify RMB XB settlement, started in Shanghai
Citi is asked by SAFE to nominate 2nd batch of pilot clients.
Executed the 1st RMB cross-border lending transaction in Jan 2013
1st bank to launch multi-currency notional pooling with RMB capabilities in China in Mar 2013
1st global bank approved to set up branch in the SFTZ in Sep 2013
Executed the 1st RMB cross-border auto-lending transaction in Nov 2013
The only foreign bank to be elected as the Vice Chair of Shanghai Banking Associate SFTZ Committee in Dec 2013
Launched 1st SFTZ RMB auto cross-border pooling structure in Jan 2014
Launched 1st SFTZ RMB cross-border POBOROBO and netting deal in Feb 2014
1st batch approved by SAFE on SFTZ – FCY cross-border pooling, POBOROBO and netting Structure in May 2014
Enable automatic sweep connecting China and London. This now means Citi has live automatic RMB cross border sweeping capabilities in China, Hong Kong, Singapore, and London.
PBOC
Nov 2014
Release regulation to expand RMB Cross Border business from SFTZ to nationwide including Pooling, POBO/ROBO, & Netting.
7 Supporting Growth
Working Capital Management1
56% (2009)
76% (2014)
24% (2014)
Yes
No
Working Capital Investment Given investor focus on returns, maintaining an efficient balance sheet is imperative. Effective working capital management initiatives reduce invested capital required to fund growth
Treasury’s corporate finance expertise is vital to achieving success in effective organizational WCM. Treasury can drive tremendous value by helping create alignment and KPIs for achievement of corporate goals
Treasury
WC Metrics
Risk Expertise
Financial Targets
Knowledge Transfer
Treasury involvement has been increasing
Good Working Capital management reduces cash needed to run the company
Source: 1. Citi Treasury Diagnostics, 2014
▲20%
8 Supporting Growth
21% 33%
2009 2014
Treasury Deployment of Supplier Financing1
▲12%
Reducing Working Capital Investment
Purchase Order
Invoice Payment Issuance
Cash Outflow Sale Invoice
Cash Application
Cash Inflow
Procure to Pay Processes Treasury Order to Cash Processes
Distributing corporate-wide working capital metrics to individual business units and managing these on an ongoing basis is essential for success
DPO Centralize and automate
processes to facilitate closer terms management
Just-in-time Supplier Financing improves take-up rates and value capture
DSO Centralize and electronify
invoices to shorten presentment
Utilize options to support sales growth - from de-risking receivables portfolio to distribution financing
Consider Export LCs in higher risk markets
Establish working capital policies
Push organizational metrics down to business unit / legal entity level
Leverage centers of excellence, migrate best practices
Treasury is increasingly leveraging working capital flows/products to drive efficiencies, with treasurers reporting a 12% surge in supplier financing programs between 2009 and 2014
Source: 1. Citi Treasury Diagnostics, 2014
9 Supporting Growth
Supporting Strategic Transactions Treasury operations involvement is critical to the successful execution of a merger - to help ensure economic value is extracted from the transaction and as a catalyst for meaningful enhancement of Treasury.
Organization
Organizational Structure
Governance, Policies and Procedures
Operations
Business Continuity
Banking Infrastructure
Systems and Technology
Financial
Capital Structure
Liquidity
Transaction Scope
v v Treasury Considerations
Legal Entity Structures v Due Diligence
While strategic transaction structures vary, these interconnected and interdependent workstreams are common elements that need to be given consideration, regardless of the form.
10 Supporting Growth
Urgent Short-Term Priorities
Strategic Transactions: Prioritizing Delivery of Desired Outcomes A truly effective integration requires rationalization and optimization of business processes and supply chain management, which are important medium to long-term considerations. Consider what are near-term “Must Haves” vs medium-term “Fix Forwards”
Re-engineering Business
Processes
Evolution to Shared Services
Review of Receivables Management
Opportunities to Outsource
Addressing Supply Chain Inefficiencies
Factors to Consider in the Medium to Long-Term
• Settlement & Execution
• Organizational Structure & Project Management
• Visibility, Cash Optimization & Investments
• Systems Integration, Connectivity & Technology
• Workflow Efficiency Tools
• Risk Management, Control & Compliance
11 Supporting Growth
Managing Contingencies Treasurers need to reassess organizational structures and capabilities to ensure capacity to manage commercial and financial risks on a more integrated basis
• Tax authorities challenging transfer pricing, and permanent establishment. OECD BEPS (Base Erosion and Profit Shifting) impact MNC tax planning and supply chain constructs
• Need to assess impact on treasury structures (e.g., In House Banks, Interco Transfer Pricing) and risk management processes (e.g., Cash Pools)
• Capital control deregulation is generally favorable (e.g China / RMB) but reverses occur. Treasurers need to be activist on how global treasury and funding structures are managed and integrated
Regulations changing how banks manage balance sheets and value client business
Capital controls and tax rules evolving
FX Volatility creating uncertainty around forward earnings and market valuations2
• Specifics vary by jurisdiction, but large banks are generally being required to hold more high quality liquid assets and enhance loss absorbing capital
• Implications for bank lending impact even IG credits, e.g. on revolving credit lines. Corporates should continue to diversify funding sources and enhance liquidity risk management
• Liquidity regulations also impact banks’ appetite for deposits, with operating deposits more attractive from a regulatory perspective. Corporates should ensure short-term cash is appropriately allocated
• Conflict, Terrorism, and Political Risks on the rise
• Treasury BCP must evolve beyond standard operational recovery to playbooks to handle broader market stresses
Sources: 1. Global Political Insights, Citi Research, December 2014; 2. Driving Corporate Growth in Divergent Markets, Citi Financial Strategy & Solutions Group, December 2014. High and low volatility companies are defined based on the top and bottom quartiles of the MSCI in terms of earnings volatility relative to their industry. Excess returns measured relative to MSCI global index and companies are re-bucketed by relative volatility each year. Sales growth is industry adjusted 3-year annualized rate, and represents the median during the time period shown.
Geopolitical tensions will be a source of unwelcome surprises1
-50%
-25%
0%
25%
50%
75%
100%
2005 2007 2008 2010 2011 2012 2014
Cum
ulat
ive
Stoc
k Re
turn
(%)
High Earnings Volatility Companies
Low Earnings Volatility Companies58%
12 Managing Contingencies
Companies should consider banking relationships and arrangements in the context of their longer term business and geographic needs, building in contingency and capability to mitigate new risks
Evolving Bank Regulations
Evolving Bank Relationship Management Strategies
FROM: Bank asset appetite vs. counterparty risk considerations as key drivers of wallet allocation decisions
TO: Multiple dimensions - bank balance sheet appetite for assets and deposits;
longer-term strategy, etc
Bank Relationship Outcomes Know Your Bank (KYB) Know Your Company (KYC)
• Needs: – Funding: need for bank capital – Treasury and business:
centralization objectives; operating services needed
• Appetite: – Wallet to allocate: transactional,
deposits, etc. – Counterparty risk appetite: credit
risk, operational risk – Buying model: e.g.,
“procurement-based” vs. relationship based
Clear Communication – Company’s Needs & Appetite vs.
Bank’s Relationship Strategy & Capabilities
• Dialogue to align KYC with KYB – Understand provider
perspectives on value of business and changes
– Determine adequacy of provider returns vs. company’s banking requirements
• Leverage bargaining power across all dimensions – Reassessment of “tiering” of
banks and wallet allocation
• Relationship Strategy – Returns (Revenue, Return on Risk
Capital) – Wallet share tier objectives – Balance sheet appetite (Asset &
Deposit) – Product / Geography preferences
(including annuity vs. episodic) • Capabilities
– Product depth and reach – Advisory
• Other – Coverage model – Performance evaluation
13 Managing Contingencies
63%
40% 37%
0%
15%
30%
45%
60%
75%
90%
FX Commodities Interest Rates
Pre-Crisis
FX Volatility – Reviewing Practices Becomes Critical
Source: 1. Factset, Bloomberg. CitiFX
FX risk is a material driver of corporate earnings volatility and Citi’s analysis suggests that companies achieving lower earnings volatility enjoy valuation premiums
FX Risk Drives Earnings Volatility1
R-squared (%) of Index Volatilities with Earnings Volatility Action Points
Treasury and finance centralization – e.g., deploying In House Banks, Intercompany Netting, Shared Service Centers – improves the ability to identify and measure risks, and leverage natural hedge opportunities. This ensures more effective implementation of risk policy.
•Consistency between business forecasts versus risk management policy
•Reflect senior management risk tolerance for both positive and negative deviation from plan
Business Alignment
•Availability and quality of business risk exposure data
•Risk management culture and framework •Aligning business plan rate setting and hedging strategy
Measurable & Realistic
•Value-at-Risk in cash flow or earnings versus the business plan
•Period-over-period volatility
Risk Measurement
•Cash flow at risk •Earnings at risk •Period-over-period volatility
Risk objectives
14 Managing Contingencies
3. Technology: Maximize Return on Investment Given tight technology budgets and focus on ROI, treasuries need to carefully prioritize technology investments and ensure maximum impact of dollars spent
Technology Budgets
Constrained Financial
Technology
ERP
TMS Bank Connectivity
Most companies have less than optimal financial technology topographies
Reality
Maximize ROI
• Pursue further automation Leverage What You Have
• Explore low-capex/high-impact opportunities Prioritize Spending
• Continuously remediate the sub-optimal Continuous Evolution
Challenges
Visibility & Access
Process Automation
Data for Planning & Forecasting
Risk Identification
Data spread across myriad systems
Cash and risk exposures not fully captured
Manual processes creating risks
15 Maximizing Technology Return on Investment
Prioritize Spending: Big Data In Small Steps
“Big data is a set of techniques and technologies that require new forms of integration to uncover large hidden values from large datasets that are diverse, complex, and of a massive scale”. Wikipedia
Opportunities FX Exposure Identification Cash Flow Forecasting Supplier Spend Analysis Connectivity Rationalization Payment STP Cash Application STP
• Stay current with ERP and TMS technology vendors’ big data driven propositions
• Leverage Global Bank
partners – those investing in mission-specific data tools to improve client experience
While enterprise level Big Data projects continue to take shape, treasuries should take advantage of low-capex / high impact middleware and systems available from technology vendors and bank partners. Data driven opportunities can quickly generate material efficiency gains
16 Maximizing Technology Return on Investment
Case Study: Big Data in Small Steps This major technology company gained material operational efficiencies, cost savings, and enhanced client experience by leveraging bank big data-driven analysis of flows across 50+ countries
Reality Many years of growth organically and by M&A Complexity of multiple internal systems, processes, and external connectivity points Resource and technology constraints to sponsor reengineering
Assessment Insights Actions Results
Connectivity Setup
Client Service Model
Inquiry Processes
Transaction Processing Formats
Automation Rates
Multiple connection points increase possibility of errors
Time zone lags between company SSCs & bank service representatives
Client staff turnover creates gaps in data continuity
Majority of service inquiries through unstructured emails
Low STP rates adds manual processes and bank fees
Process-mapped payment flows, system architecture
across 50+ countries
Re-engineered client Global Support Model
Delivered Technical Training Program
Annual intercompany
emails eliminated
Transaction inquiries reduced
STP improved
1%
17 Maximizing Technology Return on Investment
Conclusions: Two Steps Forward, Half Step Back Treasurers must cope with the challenges of supporting the business in an environment of both growth and increasing complexity.
Returns Risks Regulations
1. Supporting Growth
2. Managing Contingencies
3. Maximizing Technology Return on Investment
Priorities
Drivers
18 Maximizing Technology Return on Investment
Citi Treasury Diagnostics
Built on Six Aspects of Treasury Operations
Liquidity Management
Working Capital Management
Risk Management
Subsidiary Funding and Repatriation
Policy and Governance
Systems and Technology
Identify Where You Stand Relative to Peers—Learn What Counts as Best in Class
Benchmarks Benchmarks Relative Performance Detail
Winner, Celent Model Bank
Award
Silver Winner, Solution of the Year, Treasury and Risk
Alexander Hamilton Awards Winner, Innovative Product
Performance Risk Management +/- Policy &Governance
Liquidity
Working Capital
Sub Funding &Repatriation
Risk Management
Systems &Technology
3.0
2.9
3.0
2.9
3.0
2.9
3.0
2.9
My Relative Performance
Process Area Against Peer Group Against Universe
Liquidity/funding risk Worse Worse
Interest rate risk Worse Worse
Foreign Exchange (Transactional) Better Better
Global benchmarking platform providing treasury insights based on data from hundreds of multinationals.
19 Maximizing Technology Return on Investment
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