The lingering after-effects of the 2008 financial crisis and the ongoing Eurozone debt crisis have forced corporations to re-evaluate the stability of their core banking teams. As bank ratings decline, government takeovers increase, and troubling issues — such as the Libor scandal — continue to erode customer confidence, counterparty risk and exposure from banks have become heightened concerns for corporations. Seventy-nine percent of executives interviewed for this study listed stability and financial performance as top criteria for selecting and keeping core banks.
In addition, the liquidity and capital regulations imposed on financial institutions under Basel III have pressured banks to increase their pricing to reflect the costs of compliance with the new rules. Corporate credit has become much more expensive, and as a result, corporate financial executives are becoming much more rigorous about how they manage their banking relationships and how they distribute ancillary business among their core banks. Many are reviewing their pricing policies and agreements with primary banks and are assessing the cost versus benefit of each service used. Some have increased the number of banks in their credit facilities to reduce risk, and many are exploring bond markets and other alternative sources of funding to avoid higher costs. However, it is not just the companies that are re-examining their relationships. Regulatory reforms are driving banks to strategically assess their businesses to adapt to the new environment. In a recent study conducted jointly by
Ernst & Young and the International Institute of Finance (IIF),1 the 75 banking executives interviewed for the study agreed that the more stringent liquidity and capital requirements under Basel III will have a fundamental impact on business models, and ultimately the profitability of the industry.
Sixty-five percent of banks studied are evaluating their portfolios — assessing risks and profitability by business, geography and product, including a thorough look at all corporate relationships, individual customers and facilities to decide where, how and with whom they will do business going forward. Close to a third are exiting lines of business that are no longer profitable, several (13%) are exiting countries where profitability is lower or where unfavorable regulations could trap liquidity and capital, and some are retreating back to their home countries.
Both corporations and banks are facing the ongoing challenges of short- and longer-term business planning in today’s fluid market environment. As one corporate executive summed up,
“I like managing in today’s turbulent environment to Whac-Amole with my team.”
But despite these disruptive influences on corporate and banking interactions, the executives interviewed emphasized that the traditional principles of what makes business relationships work still very much apply and, in fact, are more important than ever in today’s turbulent environment.
Respondents agree that establishing and maintaining a strong working relationship with banks requires hard work, mutual respect, and trust and commitment on both sides. While the majority of executives (63%) gave their current core banking teams high marks on overall performance, banks fell short of expectations on 11 out of 16 key performance criteria used to select and continue core bank relationships (see “Overview: Bank performance against corporate criteria for selecting and keeping their primary group of banks,” pages 6 and 7 of the pdf document).
Based on our discussions, there are several critical performance fundamentals that banks need to consider to more effectively manage relationships with their strategic corporate clients:
It’s all about service. An overwhelming majority (89%) of respondents voted service quality as the most important criterion for selecting and continuing their core banking relationships. Companies assess service performance using a variety of metrics: availability, approachability and professionalism of the people; knowledge of the business;
Find the complete report in English in the attached pdf document
