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Looking Ahead to 2012

Insights from Stuart Bailey, Head of Market Management and Planning, Transaction Banking, Lloyds Bank Corporate Markets

2011 has been a tumultuous year. How have corporate priorities changed over this period?

Treasurers have placed a major focus on liquidity and risk since 2008, and this priority has remained constant ever since. At the time of the crisis, many companies took remedial action to refine and revalidate their treasury policies. These experiences are now proving very valuable in addressing the challenges and uncertainties of the current crisis.

What is becoming increasingly apparent, however, is the unprecedented speed of market change. This exacerbates the pressure on treasurers to ensure that liquidity and risk management policies and decision-making are sufficiently responsive and flexible. In addition, now that many treasurers have achieved a high degree of control over cash and risk in their primary regions, they are now ensuring that regional treasury policies are aligned, and smaller countries are integrated within the remit of regional or global treasury hubs.

You mentioned that treasury committees have adjusted treasury policies in recent years to reflect a new market situation. In what ways has this been the case, and is there more they could do?

During the crisis of 2008-9, many treasurers found that their treasury policies were insufficiently flexible to deal with extreme market volatility, and are now, therefore, better prepared for the current crisis. Credit risk has become a higher priority, with most treasurers sacrificing yield for greater security of cash. Difficult trading conditions, the weak economic backdrop and potential reduction in traditional funding sources are creating a greater focus on cash flow and liquidity forecasting, an area that we expect to continue developing.

While many treasurers have already achieved considerable sophistication in their risk and liquidity management, in such a volatile environment, treasurers should now be focusing on taking risk analysis to a new level. In particular, scenario analysis and contingency planning need to be prioritised to ensure that whatever the future holds, particularly in a highly challenged Eurozone, treasurers are not caught off guard. This covers all aspects of counterparty, FX, commodities, interest and operational risk.

One of the constant challenges that treasurers face is how to balance credit-driven analysis, using credit ratings and other measures, with the need to diversify their risk across a range of instruments and counterparties, and the wish to reward banks that are actively supporting them. We have seen that while there is a general desire to rationalise banking relationships, a significant number of treasurers have increased their banking relationships in the past year, particularly in Asia, suggesting that some treasurers have diversified counterparty risk, while others may have been forced to use more banks for the services they require in the wake of the crisis. With continuing liquidity constraints, and no reduction in the demand for liquidity, those in the best position to weather a difficult period will be those with stable, trusted bank relationships with a deep understanding and commitment to supporting the business dynamics and strategic vision.

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