More challenges ahead for cash management providers

After picking up more than 1,000 domestic mandates in 2002, HSBC expects next year will be a challenging year for cash management providers, says the bankÆs head of cash Lawrence Webb.

Head of cash management at HSBC, Lawrence Webb, and regional head of sales, Nigel White, speak with FinanceAsia about a recent drop off in large multinational mandates for regional banks and about continued caution from customers in the year to come. They conclude that those banks with a strong in-country branch network will fair better by picking up domestic mandates from local providers.

What sort of year was 2002 for cash management banks?

White: It has been a lot quieter this year in terms of large multinational RFPs. There was a drop off in about July, which is normal over the summer period, but then when the third quarter came around it didn't really pick up again. There have been some big in-country deals but fewer Asia-wide deals.

How well has HSBC done in domestic markets?

Webb: Year to date we have picked up just over 1,000 mandates from a whole range of domestic companies, from smaller SMEs to bigger corporations. This business has been better than steady for us and we are doing everything for these customers from basic operating accounts to electronic access to liquidity management. Our liabilities base in Korea has doubled and in India we are also well ahead with a growth in liabilities of 30% year on year. Overall our domestic transaction volumes have increased by about 20% in most Asian countries.

Are these domestic firms choosing you over other foreign banks or over local banks?

Webb: Mostly we are taking market share from foreign bank providers but we also go head-to-head with domestic banks. Most of the 1,000 mandates that we won were bid situations where the domestic company asked us to bid against another foreign bank. But we also win a lot of business that doesn t go to tender.

Why has there been a drop off in larger multinational RFPs?

White: The uncertain economic environment means that companies are looking to reduce their costs by pursuing in-country efficiencies rather than focusing on developing major liquidity structures across the region or setting up regional treasury centres (RTC). The one exception to this is China where big companies are still busy. In China companies are gearing up and as a cash management provider you have to keep your finger on the trigger in terms up keeping tabs on the regulatory changes.

What are some of these regulatory changes?

Webb: Shanghai promulgated a law in June this year making it possible to set up a RTC centre in China. They are offering tax incentives for foreign companies who want to use the country as a regional treasury base. Between July and early October eight companies received regional headquarter status which means they can now run their RTC from Shanghai. I understand there are another 18 companies that have applied and await approval. This is a clear trend for the future.

Does this mean people are choosing China over other financial centres like Singapore and Hong Kong?

White: Not entirely. There are still plenty of companies who want to use these two centres as their entry points into the region. But it is fair to say that companies are now realising that they have a choice between places like Hong Kong and Singapore and other cities like Manila, Penang and Kuala Lumpur. The options for companies have broadened.

What trends are you witnessing in terms of client demands and product needs?

Webb: With interest rates still so low we are having to run hard on the liability side in order to keep our margins at a reasonable level. We are still in an environment where banks are reimbursed through their liability balances - this has happened for years and I don't see that changing quickly. But in last six months we have had some interesting conversations with our clients about paying fees rather than leaving large balances in non-interest bearing accounts. The ultimate objective for these CFOs in terms of their cash structure is having the ability to use all of the liquidity available to them. If they have balances lying around in non-interest bearing accounts then the structure is not working for them.

So you are talking about more effective liquidity management?

Webb: Yes, this is a big area of focus. Companies no longer want to be in a situation where they have big balances sitting in accounts in some countries and are then required to borrow funds in other countries. Even markets like China have woken up to this trend. The government there recently passed an entrusted loan regulation which means that subsidiaries within a company can now tap into intra-company liquidity as long as they arrange the transaction through a bank intermediary. The economic environment also means that risk management is high on the agenda and companies are looking for account structures that don't expose them to unforeseen risks. Visibility at headquarters has become important and subsidiaries should not be able to open accounts without the approval from headquarters. And there should be separate payables and receivables accounts so that there is no confusion between what is coming in and what is going out.

What sort of sweeteners are you offering prospective clients in order to win the business?

White: We don't have generic proposals -- our offering always depends on the needs of the client. And we are not in a position where we need to undercut. One of our biggest advantages is that nobody doubts our commitment to Asia. Some of our competitors have been downsizing and this sends out a bad signal to the market.

What is on the agenda for HSBC in 2003?

Webb: We have some big product roll outs planned for next year. At the moment we are offering internet banking for our personal and SME clients. Next year, starting in the first quarter, we will roll this out for our sophisticated large cross-border companies. We will be adding some significant new functionality to our web offering.

Will it be a challenging year for cash management banks?

Webb: Yes. I don't envisage a change in the interest rate environment and that will continue to put pressure on margins. In my view, there is not enough space in the market for all of the international banks that are currently vying for business. Banks that don't have critical mass like HSBC are questioning the value of doing some deals when margins are so low. I can see some of them having reduced appetite for these transactions, and once this occurs they will lose ground. You need critical mass in this market to ensure sustainability.

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