Transaction banks are particularly excited about moves by Chinese regulators to relax restrictions on the use of the renminbi as payment for cross-border transactions. Transaction bankers say the changes in the industry would likely accelerate as the region continues to prosper. Regional players will continue to be strong on cross-border payments and trade, and they will increasingly see competition from locals that are beginning to flex their muscles in those areas.

 

As a result of the global slowdown, some regional players have either been forced to seriously downsize their operation in the region, while corporates that used to hold a monolithic view have decided it was wise to stop placing too much of their trust in one bank and now look favourably at multiple bank relationships. This is having the effect of significantly fragmenting business for regional banks that were heavily reliant for business from their home region.

 

If ever there is one thing about the crisis that transaction banking can be happy about it is that it has completely subverted the banking hierarchy and lifted the public’s estimation of bankers on this side of the business. It might not be an easy environment in which to operate but the dominant view among senior transaction bankers whom we interviewed is that they are coming out of the crisis in a much better set of circumstances than before.

 

Granted, there were major parts of the business that bore the brunt of the crisis, such as securities servicing where margins were being considerably squeezed as a result of the significant decline in interest rates and the substantial fall in the value of both securities and other asset classes.

 

 

The cash management side of the business has fared slightly better but not that well compared to the previous year, on account of interest rates remaining at their lowest. Transaction bankers say that they continue to experience strong transaction volumes.

 

In Standard Chartered, for instance, wholesale banking helped propel earnings to another record high in the first half of 2009. Income rose 14% during the period to US$7.96 billion while operating profit before tax climbed 10% to $2.84 billion.

 

The performance was mostly driven by the strong momentum in wholesale banking with income rising 37%. The bank benefited from market dislocation and volatility  that resulted in it taking more market share.

 

Peter Sands, group chief executive say the bank's balance sheet strength has now become a source of competitive differentiation that has helped the bank to win more businesses. “We are in the right markets at the right time.”

 

The tougher environment means risk management has now become an even more pre-eminent concern. But that does not mean that the banks have distanced themselves from clients. On the contrary: most of them have been taking a more engaged approach to sorting out the problems of their clients. “We don’t work in a vacuum and so if our clients and their clients have problems, we will have problems too,” says one. 

 

Most agree that the industry has changed and will continue to evolve based on the new regulatory environment taking shape. John Laurens, head for global payments and cash management in Asia-Pacific for HSBC, is happy to report that instead of cash levels declining in the last nine months that his bank actually saw record levels of cash management business and traces this to the increased focus of clients on liquidity and working capital management. Laurens says that overall the turmoil in financial markets had the positive effect of deepening the bank’s relationships with clients. The tougher environment, he adds, has allowed them to work more closely with the clients to review and improve cash and risk management policies. “Our commitment to partnering with clients to streamline business processes and realize efficiencies has never been more in evidence.”

 

Earlier in the year, HSBC surveyed 300 Asia-Pacific corporates on their key areas of focus for 2009 and 85% identified working capital management as a top priority. Laurens says HSBC has been active in helping corporates capture the full value of their liquidity, by mobilizing liquidity to the greatest extent possible and optimising returns on positions in restricted markets. “The latest trends have shown that an increased attention to transactional banking efficiency and liquidity management solutions combined with more accurate cash and FX exposure forecasting are fundamental building blocks that treasuries need.” 

 

 

Thomas DuCharme, head of global transaction banking for Asia Pacific (ex Japan) at Deutsche Bank (DB), says that despite the challenging economic climate, the transaction banking business generally stood out in terms of generating profits for the bank. “The gains continued despite a shift in focus to back-to-basics.”

 

DuCharme says a key theme across cash management, trade finance and domestic custody services is the flight to simplicity. “On the cash management front, cash is still king, and we see clients focussing on optimizing liquidity so as to maximize the utilization of cash available.” 

 

On the other hand, FI clients are looking for alternative sources of revenues given the thinner margins they get under the current market environment, whilst corporate clients are looking at their own liquidity positions and of those across their entire supply chain. 

 

DuCharme says FI clients are reassessing their strategic investments in technology and infrastructure to determine whether they can ensure sustainable investments or should consider the option of outsourcing to a strong global provider. Corporates are keen to understand the exposures of the entire supply chain and are engaging their suppliers to see how they can better minimize gaps or delays in receivables management. Our FI and corporate clients are taking a serious view on risk management and how their banks will help them to steer the course with optimal efficiency.”

 

Simon Jones, regional treasury services executive for the Asia-Pacific at J.P. Morgan, sees transaction banking gaining even more cachet and importance down the road as its contribution to banking revenues grow. He is sure that, “over the years no one will see it transaction banking as just a mere back office function,” and hardly a backwater for banking talents. He notes that despite the grave economic environment transaction banking has provided the core annuity stream for banks’ operations. Jones however says that it will not be easy going forward. He sees more consolidation in the competitive landscape, adding that competitive pressure given that new players are expanding their transaction banking network as well.

 

The good thing about the business of transaction banking, Jones notes, is that it is a “long-term play, with fortunes not won and lost in a quarter or a year.” He says the challenge faced by the majority of the larger players is ensuring that they remain focussed on transaction banking and do not get distracted by any internal turmoil (financial or otherwise). “Invest­ments in people, products and clients need to be sustained during these difficult times or the momentum of the business will be lost – and if momentum is lost, it takes a long time to recover.” 

 

Jones says those that make rash and reactive decisions will face significant challenges too. “Although the changing environment will provide a host of opportunities, those that stick to their core strengths and remain on strategy will have the fortitude to make a success of the business.”

 

 

Tarek Anwar, managing director and global head of sales, transaction banking with Standard Chartered Bank, says that at no other time has he seen change so sweeping through the industry. Anwar says that at the height of the crisis there was lot of concern regarding the strength of banks, and to complicate matters, the banks themselves did not even trust each other.  That, he adds, prompted a heavy flight to quality where strong banks such as Standard Chartered Bank benefited. The cautiousness and strong aversion to risk filtered down to the corporates. “The banks and their clients found themselves reassessing risk management, counterparty risk management and processes and methodologies.” 

 

Anwar says his bank has had long discussions with corporate clients to guide them in the right direction. “The corporates need to start looking at the whole supply chain within their financial ecosystem, not simply in terms of the mechanical supply chain but what we have really been talking about the survival of suppliers that will have an impact on everyone’s business. As banks, we don’t exist in a vacuum and our success will depend on the success of their clients.”

 

Anwar says the growth of economies in Asia and their potential for even more growth has prompted a good many corporates to continue shifting their focus and attention to the region. Other FIs have been interested in leveraging their presence in emerging markets, he points out, but unless they put in the requisite investment in people and infrastructure, they are unlikely to create a dent in the region.

 

Anwar says the barrier to establishing a franchise in the region has grown formidable. Besides competing with regional players, the new competition will also have to deal with domestic institutions that have grown stronger in the intervening years and have been aggressively building their own regional platforms. In Malaysia, Singapore and India, the banks are becoming stronger, not weaker in the aftermath of the crisis. The banks in these countries enjoy strong liquidity and they are trusted names locally. Instead of expanding in Asia, several European banking operations are actually trying to streamline their operation in the region to be able to cut cost.

 

Anwar dismisses the misconception about Standard Chartered having just got lucky in this round of the crisis. “I can assure you that we did not achieve what we did by a fluke. Our business strategy in the region has been in place for some time and that strategy has given us a growing market share in countries across the region.” While there has been aggressive streamlining from competitors, his bank, he says, has been hiring.

 

Jones of J.P. Morgan says risk mitigation has become a key challenge both for clients and their banks. “The last 9 months have taught us that companies need to include risk management techniques in everything that they do.” J.P. Morgan, he says, has robust risk management practices and helps its client manage their own risks such as settlement risks, operational risks and FX risks. “Clients too are looking for efficiencies; therefore banks must continue introducing new products and services by investing in technology and infrastructure to keep up with the evolving needs of clients.” 

 

Jones says that unlike some of their competitors the bank hasn’t streamlined or consolidated its business. “We have continued to invest and have increased the number of clients we call on to ensure we understand the impact on our clients’ business. In 2008, we extended our product offering of cross-border and local cash management as well as our trade finance services, and more recently Escrow services for domestic clients in India, where we continue to expect double digit growth this year.” Furthermore, the bank has launched tools to reconcile receivables, allowing operational cost savings and better management of working capital. 

 

The bank has started offering ISO 20022 payment initiation and reporting capabilities. J.P. Morgan is amongst the industry leaders adopting this new messaging standard format that allows clients to integrate core treasury, payable and receivable applications with banking and other financial partners over the SWIFT network.

 

 

DuCharme of DB says there have been significant changes in the types of products and services that are demanded by clients in trade finance. “As a result of the challenging credit environment and a decline in alternate liquidity sources – the demand for risk mitigation and financing products such as documentary letters of credits (LCs) and other traditional forms of trade finance have recently increased.”

 

Other emerging trends include increased need for supply chain finance products. Large corporates are generally concerned if their smaller suppliers and buyers are being adversely impacted by the environment. Given that this potentially increases business risks for the corporates, they are now talking to work on solutions where they can support their external supply chain members through bespoke financing programmes. 

 

On the custody front, outsourcing opportunities are emerging from this challenging environment. The attraction to invest in Asia remains intact. 

 

DuCharme says he view the current market environment as an opportunity to build market share by acquiring new clients. “Being one of the few major global banks not to have received government assistance, DB continues to invest in its core systems and has the capability to expand in-line with the aspirations of its clients, rather than focussing solely on its home market.”

 

DuCharme says 2008 saw the increase of the DB’s branch network in India, Pakistan; and China, where the bank has extended its corporate renminbi services throughout the country and is planning to expand its branch network in key Chinese cities in 2009. In July, DB obtained approval from the China Banking Regulatory Commission (CBRC) to open a branch in Tianjin. The new branch in Tianjin will mainly conduct transaction banking and corporate banking services and is expected to be operational by the end of 2009. In addition, DB has expanded its partner bank alliance with Tai Fung Bank in Macau and ABBank in Vietnam to further enhance its distribution network.

 

Jones of J.P. Morgan says the importance of the CFO/treasurer’s role has been highlighted as ensuring liquidity is critical to maintaining the financial stability of a company. This year the group expanded its geographic footprint in China by opening a branch in Guangzhou, with more locations to be announced soon.  Liquidity management is especially important in this difficult economic climate because a strong balance sheet is such a strategic asset. “The lessons of recent market events have propelled many institutions to begin to make their companies “shock-proof” to help prepare and shape their business for tomorrow.”