The Effect of the Financial Crisis on Corporate – Bank Relationships
by Dr Jochen Stich, Group Treasurer, Porsche Holding GmbH
The financial crisis has at least taught people in finance, besides a couple of other very valuable aspects, three major lessons:
- Nothing is ‘too big to fail‘
- Even banks can go bankrupt
- The relationship between corporate and bank has very well-defined limits
But previous experience should have taught us something including the failures in the early 70s of Herstatt in Germany and Barings in 1995 in the UK. At the beginning of 1990 Ulrich Cartellieri of Deutsche Bank stated that “the banks are the steel industry of the 1990s“, and in July 2007 Jochen Sanio, president of the German financial supervisory board (BaFin) said that we were threatened with the worst banking crisis since 1931. From all this we should have deduced that in an environment where the desire for ‘pick-up yield‘ was all that mattered, and the pure availablity of liquidity was never questioned, something was definitely amiss.
When we at Porsche Holding GmbH, Salzburg/Austria, placed the last ABS transaction in 2006, at 5 bps (!) above EURIBOR, we wondered why people should read through all the documentation needed in an ABS transaction to identify what risk you are paid for as an investor and then to take on that risk at such a price.
But it was just that experience which made us rethink our banking relations.
The core bank philosophy – dead or alive?
As the largest automotive dealer group in Europe with a turnover of approximately EUR 12.5bn, sellling the whole range from VW, AUDI, SEAT, Skoda to Peugeot Citroen BMW up to Porsche, Bentley & Lamborghini with main coverage of France, Netherlands, Austria and the CEE countries plus China, and being 100% family-owned, our profile, from the treasury perspective, was as follows:
Mainly cash flow business, sophisticated cash management, money market business, some IRS, strong FX business in CHF/HUF/CZK/SKK/RON/UAH;
Interesting fee business: securitisation of the financial services portfolio, from time to time larger long-term financing as USPP, small asset business from the pension trust.
Although we have tried to diversify our funding sources, there is still a high dependency on banking finance.
As a result of these financial activities we do have a circle of core banks who are eligible to bid for our fee business, while also providing the necessary liquidity for our growth by the acquisition of retail businesses, internal growth which has additional needs for working capital, and the growth in the accompanying financial services business which is the main liquidity absorber.
This circle of banks is complemented by some special finance institutions, our so-called regional/other banks which reflect the need for opportunistic bidding in special/local segments. We are not a frequent issuer of capital market instruments and are ‘consultancy resistant‘: in other words our M&A business has been executed from our own resources. Consequently although we have tried to diversify our funding sources, there is still a high dependency on banking finance.
Before the financial crisis we critically analysed our banking relations, and also considered a couple of external signals which did not fit into the general picture.
The German Association of Corporate Treasurers (VDT e.V.) in 2006 organised a poll analysing banking relationships in German corporates. To the question: Under which aspects do you value the bank-client relationship?, senior bankers and group treasurers responded as follows:
- Cost of risk (expected/unexpected loss)
- Cost of capital
- Administration/Handling expenses
- Quantitative evaluation
- Qualitative evaluation parameters are less important
- Long-term reliability
- Low prices
- Expertise and social competence
- Qualitative aspects under minimisation of cost
As treasurers, we need to ask ourselves whether we are guiding our relationships with the most important suppliers in the right way. According to these replies, the answer is definitely no. Treasurers appear to cling strongly to the old, person-related “I trust you, you trust me, plus a little bargaining about the pricing“ attitude, whereas the bankers seemed to view their relationships much more rationally.