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Yield, liquidity, bank relationships

The Association of Corporate Treasurers' annual survey pinpoints three key FD concerns

Lehman may be long dead and the Icelandic banking crisis an age-old headline by now, but the scars are still there – and nowhere more so than in the attitude of finance directors and treasurers to the management of the company’s cash.

For a while “yield” became the forgotten word in the old mantra of security, liquidity and yield. Instead, everyone wanted to know that the institution holding their precious cash was safe and that they could retrieve it at a moment’s notice. According to this year’s JP Morgan Asset Management annual global cash survey, supported by the Association of Corporate Treasurers (ACT), which takes in sentiment from FDs and treasurers in both US and European businesses, the extreme risk aversion felt in Q3 2008 may have receded, but treasurers remain cautious in the wake of the financial crisis. And who can blame them? With banks still talking about counterparty risk – meaning themselves, not their clients – treasurers need to stay on their toes. Especially as the survey found that more than half of the treasurers surveyed have more cash than they did last year, so they have had to increase their exposure limits to their relationship banks.

As noted in the survey by JP Morgan’s Jim Fuell, head of global liquidity for EMEA, treasury departments have focused on spreading their banking relationships over a wider base for a third successive year. Twenty-nine percent say they have invited more banks into their funding and liquidity arrangements than they had in 2009-10, while 21 percent acted to reduce the number of banking relationships they have. “[The focus on having more bank relationships] may stem from the increased focus on counterparty and operational risk with treasurers looking to diversify their exposure,” says Fuell. He added that 64 percent of treasurers asked selected counterparty risk as one of the top five concerns in their treasury department today.

Now in its 12th year, the ACT/JP Morgan survey has been providing a valuable snapshot throughout the last economic bubble as well as the current downturn, and is building something of a history of corporate thinking on cash matters. What has been found this year is that most FDs and treasurers’ primary concerns are still tethered to ongoing economic uncertainty on both sides of the Atlantic. Most are still very concerned about liquidity and the viability of the banks to whom they entrust their extremely hard-earned cash.

Asked by the ACT to name areas of importance for the treasury department, 88 percent said cash management: the basic stuff of ensuring the right amount of cash is in the right place and in the right currency at the right time. The second-most important area – cited by 83 percent – is cash flow forecasting, a job that is as important as it is notoriously difficult to get right. Investment, controls and reporting, and ensuring compliance with the strict rules many companies now have in place – about how much cash they can have with anyone one bank and for how long – are also matters that are keeping FDs and treasurers from their sleep.

The survey did give one sign that FDs and treasurers may believe some sort of normality is returning. Last year, the majority of treasurers were content to receive returns in line with Libor from their surplus cash: the most commonly selected return preference this year was Libor+.

The hunt for yield is back.

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