Treasury Models: Proactive Planning and Execution

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2 : Proactive Planning and Execution Across Asia Pacific, corporations are proactively examining treasury structures to support current and future growth plans. As a result, treasury enhancement projects are rapidly evolving in scale, scope and sophistication. Even more encouragingly, centralization and distribution of activities is becoming increasingly core to supporting enterprise wide objectives. In other words, defining the right treasury structure has never been more critical than today. The results of the 2013 Bank of America Merrill Lynch SunGard Treasury Management Barometer clearly support the shift towards more sophisticated treasury structures in Asia Pacific. On a regional basis, respondents stress that centralization is now a more prevalent tool in strategic enterprise decision-making. Traditionally utilized as a cost mitigation tool, centralization now serves as an incubator, initiating and driving change in both more established multinational corporations and emerging market-parented MNCs. Changing centralization dynamics The move towards broad-based centralization practices represents a sizable treasury industry shift. Encouragingly, many corporations, especially those parented in the region, are evolving more rapidly than their overseas counterparts. 72% of survey respondents indicated that they have implemented varying degrees of centralized treasury operations. Furthermore, the type of corporation implementing centralization projects is evolving. Historically, large multinational firms have centralized transactional activities into a shared service center (SSC) as a means of cost reduction and to migrate more strategic elements such as basic treasury activity into the center. Interestingly though, as the results reveal, middle market corporations are increasingly focusing on developing their treasury structure strategically to foster growth goals. Corporate entities in Asia are transforming themselves at a rapid pace, in line with changes in regional economic dynamics. Intra-Asia expansion by Asian and global companies both from a manufacturing and distribution perspective is re-defining regional treasury practices and the way that corporate clients view their historical treasury models. As a result we see an increased focus from our clients in pursuing centralized treasury structures to hub processes, whereby they can manage liquidity and risk and optimize operational efficiencies. We see this as an evolving theme with Asian large local corporate clients and an accelerating trend with large global clients as they look to shift from beyond basic centralized processing to more sophisticated treasury and transaction models focusing on further developed treasury activity and consideration of structures such as on-behalf-of and in-house banking." Percy Batliwalla Head of Treasury Sales, Global Transaction Services Asia Pacific Bank of America Merrill Lynch 43

3 How does Asia Pacific compare globally? Internationally, developments in treasury structure have often been more evolutionary rather than revolutionary. They have largely been motivated by external forces. For example, challenging economic conditions, particularly in North America and Europe has prompted centralization to projects as a means of reducing overhead costs and supporting regulatory adjustments governing treasury practices. Operate with a regional treasury 72% 28% Do not operate with a regional treasury % of companies with RTC by revenue 77% 68% 67% 66% 59% >$10 billion $1-5 billion $5-10 billion $100 million-$500 million $500 million-$1 billion As far as treasury centralization is concerned in Asia Pacific, the often-blurred distinction between a SSC and regional treasury center (RTC) must be understood in a regional context rather than as a global theme. SSCs are generally focused on efficient processing of transactions, and high volume activities. RTCs, on the other hand, often begin with basic treasury functions revolving around cash visibility, mobility and forecasting; along with their primary focus on FX management, funding and risk management. Unsurprisingly, many of the corporations surveyed continue to manage accounts payable (A/P), accounts receivables (A/R) and banking relationships at a subsidiary or business unit level. However, middle market companies are increasingly implementing SSCs or RTCs at an earlier stage in their development. As such, they avoid building complex structures in each individual country that would need to be painstakingly unwound when larger centralization projects are initiated. Further up the value chain, RTCs are increasingly taking on more sophisticated strategic treasury management functions including risk management, compliance, debt and investment management, standard accounting, accounting for complex financial instruments, and hedge accounting. Additionally, we expect to see more SSC and RTC structures moving from basic transaction processing to integrating complex functions across the entire working capital cycle. 44

4 Q: How would you define the scope of your centralized operations? Current situation (%) 33% 31% 17% 18% Next months (%) 25% 18% 32% 25% Transaction processing only Payments- and receivables-on-behalf-of Treasury management functions Strategic treasury management 45

5 Q: How would you define the structure of your centralized operations? 42% Current situation (%) 18% 18% 12% 11% 33% 20% 19 % 15% 13% Pure transaction processing only Next months (%) In-house bank structure (IHB) Payment factory Payments-on-behalf-of Receivables-on-behalf-of The sophistication drive In the next months, as the focus beyond transaction processing gains momentum, respondents indicated a growing appetite to adopt an in-house banking structure. More suited for MNCs, activities dedicated to cash management, foreign exchange, and funding different business units within the enterprise are driving interest in in-house banking structures. Once implemented, the structure can help optimize liquidity, reduce external transactions and manage intercompany activity. In addition, via the implementation of an in-house banking structure, corporations have potential to achieve cost savings, a reduction in the number of external bank accounts and foreign exchange efficiencies. Payment factories are further enabling transaction cost efficiency, heightened visibility, reduced cost of ownership, lower risk of fraud, and improved standardization across the region. This structure also provides functionality to route payments through incountry accounts avoiding some international settlement fees. However, the use of technology is essential to enable this activity properly due to certain regulatory restraints in Asia Pacific, payment factories cannot support receivables. Once a corporation has established an in-house bank and a payment factory, it can implement a payments-on-behalf-of (POBO) structure wherein payments on behalf of the subsidiary, or one entity authorized to make payments for another entity, are processed. Similarly, the receivables-on-behalf-of (ROBO) structure enables one entity to perform accounts receivable functions for another. ROBO can frequently be limited by regulations on cross-border collections. However, the survey shows interest in onbehalf structures for payments and receipts is emerging in the region, implementation of both POBO and ROBO remains moderate at best. Regardless, small to mid-market firms are beginning to implement in-house banking, payment factories, and POBO or ROBO structures, but unsurprisingly not at the rate observed at larger firms. 46

6 Q: Do you have a regional treasury center for your Asia operations? If yes, in which country? Geographic structure 19% 17% 13% 12% 10% Singapore China 4% 4% 5% 5% Other US Australia India Hong Kong 3% Taiwan 3% Philippines 2% Japan EMEA 1% Malaysia 1% Korea 1% 1% Indonesia Thailand New Zealand 47

7 The geographic trend Singapore was the most preferred location for a RTC with 19% of survey respondents have established centralized operations in the city-state. As a business-friendly jurisdiction with beneficial tax incentives and infrastructure, Singapore also plays host to numerous SSCs with a focus on transaction operations. Singapore was also identified as a popular location for the aerospace, chemical and construction industries. China and India are proving to be emerging locations both from a cost and strategy perspective. Companies have set up SSCs in China and India as a way of training new personnel, developing skills and building awareness of company culture. India is a popular location for companies across many industries, including automotive, chemicals, construction and non-financial service industries. China has introduced tax incentives to encourage growth in cities like Dalian. It is also possible that firms with a majority of business revenue generated in China have established treasury centers to better leverage the domestically-pooled trapped cash there. Malaysia has introduced incentives to encourage firms to open RTCs in Malaysia alongside the more established SSC space in the market. Several corporations have started to look at Malaysia and we see this with other countries in the region too such as Philippines and Thailand. Treasury structures are undergoing a sizable shift, at first their focus is centralization of their pure transaction business but moving forwards we will see a clear shift towards more strategic functions on either a regional or global basis. While many consider Singapore as a gateway to the region, we are seeing treasuries look beyond the jurisdictional and tax advantages to consider the demands of their treasury and business over the next years and strategically planning their geographic structure accordingly. The revolution is underway, we are seeing a definite shift beyond pure transaction processing to an appetite to implement in-house banking. While gaps remains around regulation, resources and experience, trends have shown that we should anticipate a growth complexity of local and regional treasury to meet the growing demands of their quickly internationalizing businesses. Brad MacLean Vice President, Business Development SunGard 48

8 Most popular location according to industry Aerospace China 87% Agriculture Singapore 26% Automotive India 63% Chemicals China 72% Conglomerate Australia/China 75% Construction, Electronics & Technology India/Malaysia 82% Energy, Power & Utilities China 58% Financial Services India 36% FMCG China 70% Healthcare China 58% Manufacturing China 71% Natural Resources China 70% Services Non Financial India 60% TMT China 64% The year ahead Limitations surrounding cash visibility is a frequently-expressed pain point and the primary focus for treasurers in 2013 according to survey results. This sentiment was expressed by corporations of all sizes, but is a more pressing priority for larger firms. Restricted cash visibility often results from limited connectivity between different systems within the company and having a large number of banks and bank accounts. Subsidiaries or business units may open multiple accounts, or mergers and acquisitions might inadvertently lead to multiple accounts, creating difficulties for treasury centers to keep track of balances across the enterprise. It is not surprising then that another area of focus for corporations in the coming year is cash concentration. This treasury function simplifies cash management and ultimately, improves cash visibility. Yield enhancement and minimizing interest rate expenses, another highly-ranked goal, are achieved through consolidation and concentration of assets. Overall, the picture is one of a move towards streamlining, concentration, and enhancing treasury functions. 49

9 Q: What are the primary areas of focus for your treasury in the next 12 months? 18% Concentrating cash 13% Counterparty risk management 18% Yield enhancement & minimizing interest expenses 16% Rationalizing bank accounts Improving cash visibility 25% Other 3% Talent management 7% Larger companies were more concerned with addressing counterparty risk and rationalizing bank accounts than their smaller peers. Talent management, while often discussed, was the lowest priority amongst treasurers, although it did grow in importance in conjunction with company size. 50

10 >$10 billion $5-10 billion $1-5 billion $500 million $1 billion $ million Improving cash visibility 67% 63% 68% 56% 56% Concentrating cash 51% 39% 56% 44% 37% Counterparty risk management 51% 42% 34% 29% 23% Yield enhancement & minimizing interest expenses 50% 48% 53% 50% 36% Rationalizing bank accounts 56% 51% 39% 36% 30% Talent management 29% 22% 18% 14% 13% Other 6% 12% 5% 8% 8% Clearly, treasury structures are undergoing a sizable shift, with changes in the speed and scope being the most noticeable. Once the realm of large MNCs, activities with a focus on centralization and its more complex forms are now being utilized by a far broader group of companies. The motivation for these firms is not purely cost reduction. Rather, it is the wholesale move from reactionary structuring to building out proactive structures to support the long-term strategic goals of the company. A clear shift beyond centralizing pure transaction processing and towards implementing more strategic functions on a regional or global level is underway. From where we stand, Asia Pacific s treasury evolution is well underway. 51

11 The survey results and interpretations in this report are not intended, nor implied, to be a substitute for the professional advice you would receive from a qualified accountant, attorney or financial advisor. Always seek the advice of an accountant, attorney or financial advisor with any questions you may have regarding the decisions you undertake as a result of reviewing the information contained herein. Nothing in this report should be construed as either advice or legal opinion. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation. Survey prepared February ARN5W570. SunGard is one of the world s leading software and technology services companies. SunGard serves approximately 25,000 customers in more than 70 countries and has approximately 17,000 employees. SunGard provides software and processing solutions for financial services, education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software. With annual revenue of over $4.0 billion, SunGard is one of the largest privately held IT software and services companies. For more information, please visit HYPERLINK "