Senior management fails to invest in treasury department despite the key-role they play in times of crisis

Brussels, 25 August 2010

Belgian treasury teams among the best in the world at cash management

The recent financial crisis has clearly demonstrated that treasury departments are extremely important when it comes to dealing with the crisis and ensuring companies get through the recession in good shape. This is because a treasury department that functions well can ensure a company remains liquid and solvent during turbulent times. However, in the aftermath of the banking crisis, only a few companies seem to be investing more in people and resources for their treasury departments despite the crucial role these departments played during the recession. This finding is supported by a study, ‘The PwC Global Treasury Survey 2010: Can the crisis make treasury stronger?’, in which some 600 corporate treasurers from various companies around the world participated.

Corporate treasury: clearly adding value

While the financial crisis might have demonstrated how important treasury departments are, the results of this survey clearly show that not all companies seem to have learned lessons from the recent recession with very few investing more in corporate treasury. In total, 80% of those surveyed said that their boards were paying more attention to and expecting more from their treasury operations, but more than 95% of Belgian treasurers said that there had been hardly any increase in the treasury department’s budget following the crisis.

“Corporate treasury teams need to take the opportunity to push themselves to the forefront,” said Damien McMahon, Treasury Consulting Partner at PwC Belgium. “Quite a lot of treasurers said they still had problems getting additional investment and were having to contend with the impact of sharp movements in commodity prices and fluctuations in FX rates.The financial crisis has shed light on the added value provided by corporate treasury departments.Yet treasury departments are generally small specialist teams, with few people and insufficient resources.The recent crisis demonstrated what the outcome of this can be.Treasury departments now have an excellent opportunity to show just how important they are to companies.”

According to Kristof De Smedt, Senior Manager of Treasury Consulting at PwC Belgium, it is vital that businesses implement treasury best practices so that they are better equipped in the event of another crisis. “Although it is obvious that companies need to allocate an appropriate budget for this, we discovered that nowhere near enough of them were doing so.One possible explanation is that all too often senior management still see treasury operations as a cost centre and fail to recognise sufficiently how much added value they provide.”

Bank relationships:perception or reality?

Another striking conclusion in the report concerns the relationships companies have with the banks with which they do business. Almost 8 out of 10 participants in the survey believed that managing bank relationships was a high priority, compared to just 56% before the crisis. Before the recession, it was inconceivable to many treasurers that banks could effectively go bust. However, the financial crisis plainly showed that companies were also exposed to risks related to the vulnerability of banks. Since credit ratings had failed to indicate risks on time, companies have started to search out more sophisticated techniques, such as those based on following CDS spreads, share prices and bond yields. Consequently, the management and diversification of the risks associated with relationships with banks will play a greater role in relationships between banks and companies.

Many banks suffered liquidity problems because of the financial crisis, as credit became more difficult to obtain. The importance of building long-lasting relationships with banks suddenly became clearer to companies. Banks tend to reserve the scarce resources they have mainly for top-drawer clients, also known as ‘Tier One’ clients. “When participants were asked if they considered themselves to be ‘Tier One’ clients, no fewer than 61% believed this was the case,” Damien McMahon said. “However, if you ask the banks how many 'Tier One' clients they have, you are guaranteed to get a different picture.There is often a large gap between perception and reality.CFOs definitely need to investigate whether their company is in fact a top-drawer client, as they so often believe.”

Companies and banks therefore need to seek out a mutually beneficial relationship. This means, among other things, implementing the right KPIs so that the value of the relationship is measurable and both parties always know exactly where they stand.

Corporate treasury in Belgium: among the best in the world at cash management

One of the core responsibilities of a treasury department is to manage the company’s liquid assets. The study revealed that companies in Belgium perform extremely well in this area compared to other countries. “Belgian treasury departments often use more sophisticated financial structures to centralise a company’s available liquid assets.This means they have a better view of, and more control over, the available cash, and as a result they also have the possibility of making optimum use of these resources,” Kristof De Smedt explained. These sophisticated techniques can only be used by a handful of banks, which explains why Belgian treasurers only use six main banks on average, compared with the global average of nine.

Belgium’s success can be put down to the fact that over the years centres of excellence have been set up there purely to carry on treasury operations, owing to the favourable tax climate. This is in sharp contrast to many treasury departments, which are often only one of many departments within a company HQ.

According to Mr McMahon, cash management will be one of the main concerns for treasury departments in the future. “Companies need to avoid putting all of their eggs into one basket.They need to make efforts to diversify their sources of funding, and should not restrict themselves to banks.In addition, developing a good diversification of loan maturities is just as important to avoid adverse circumstances, if not more so.”

Risk management and best practice:new techniques required

Another core responsibility of treasury departments is risk management. Standard hedging techniques clearly do not work in irrational and illiquid markets. A treasury department needs to work with the rest of the business in order to understand better the dynamics that underlie risks. By combining this approach with in-depth knowledge of the financial markets, treasury departments should be able to come up with the best possible protection strategy. An approach of this kind calls for investments in people as well as in more sophisticated risk management techniques. This should not only mean that predictions concerning extreme market scenarios can be made in a more sound manner and in real time, it should also ensure that companies are better able to equip themselves to deal with the sometimes irrational fluctuations in exchange rates and interest rates and the fickleness of the commodity market.

“History must not be allowed to repeat itself, and companies need to learn lessons from the crisis,” Mr McMahon said.“The squeeze on funding and the volatility of the markets are still fresh in the minds of CEOs and CFOs, and this situation needs to be capitalised on so that sufficient resources can be obtained in order to implement treasury best practices.The simple truth is that although we always hope for the best we should still ensure we are prepared for the worst.”

Notes to Editors:

The PwC Global Treasury Survey 2010: Can the crisis make treasury stronger,looks at why some treasurers have been able to weather the storm better than others; assesses the long-term impact of the market dislocation; and suggests how the profession can turn the experience to its advantage. More than 600 treasurers from around the world took part in the survey, bringing together the widest possible spectrum of industries and company sizes, and making this one of the most representative global surveys of its type in recent years.