Transaction Banking for Corporates

0 Transaction Banking for Corporates T. Manabe General Manager Global Transaction Banking Department Transaction Business Division Sumitomo Mitsui Banking Corporation

1 Today s Scope Transaction Banking FI Financial Institution FI Cash Corporate Cash FI Trade Corporate Trade Custody Retail

2 Today s Scope Table of Contents Facing Corporate Treasurers - Core Functions of Treasury - Concrete Objectives - Corporate Structure - Cash Flow & Funding - Constraints Transaction Bank s Approach - Solutions - Transaction Management - Liquidity Management - Service Menu & Tools - e-channel (Internet Banking) - SWIFT Bank Readiness - Host to Host Solutions

3 Facing Corporate Treasurers Core Functions of Treasury Purchasing Manufacturing Marketing Distribution / Sales Accounting Bank Relationship Management Corporate Treasurer Currency Management Funding Management Investment Management Risk Management Cash Management

4 Facing Corporate Treasurers Core Functions of Treasury Transaction bankers will confirm and analyze Concrete objectives Corporate structure Cash flow & funding Constraints

5 Facing Corporate Treasurers - Core Functions of Treasury - Concrete Objectives - Corporate Structure - Cash Flow & Funding - Constraints Transaction Bank s Approach - Solutions - Transaction Management - Liquidity Management - Service Menu & Tools - e-channel (Internet Banking) - SWIFT Bank Readiness - Host to Host Solutions

6 Facing Corporate Treasurers Concrete Objectives Visibility Control Availability Return Risk management Efficiency Corporate Treasurers Voice I need to see all my balances across regions. I need to consolidate my balances each day to make overnight investment. I need access to all my funds during working hours in my country. I want to automate. I want to centralize risk management. I want to maximize yield on my excess funds.

7 Facing Corporate Treasurers Concrete Objectives Treasurers Needs Cash balance management Funds management Reduce number of payments Cut transaction cost Manage outgoing payments Accelerate incoming payments Aiming to Optimize account structure Keep cash flow cost as low as possible Minimize interest cost Maximize interest income Accounts receivable management Accounts payable management Stock Management

8 Facing Corporate Treasurers Corporate Structure Business life cycle Level of centralization Legal structure Scope of treasury HQ location Line of business Business structure Level of centralization and autonomy Reporting lines and management structure Liquidity management and stakeholders Key geographies Liquidity management for line of business v. whole business Nature of activities for each line of business Inter-company transaction Legal structure Domicile of incorporation Special purpose vehicle (in-house bank, borrowing vehicles, SSC etc.)

10 Facing Corporate Treasurers Cash Flow & Funding Cash conversion cycle Funding sources Debt type / location Currency exposure Long / short positions Need to understand company s working capital Definition of Working Capital Management Management of current accounts (assets and liabilities) activities and processes to ensure there is sufficient liquidity to sustain company s operations.

11 Facing Corporate Treasurers Cash Flow & Funding Buy Inventory Operating Cycle Sell Receivables Collect Raw Material Stock Period Manufacturing Period Finished Goods Stock Period Credit by Suppliers Payables Extend Working Capital Requirement Cash Conversion Cycle Shorten Cash Conversion Cycle Days Inventory + Days Receivable Days Payable

12 Facing Corporate Treasurers Cash Flow & Funding Days Inventory Outstanding (DIO) How much liquidity does a company need? Average no of days a company takes to turn inventory into sales DIO = (Inventory / Cost of goods sold) X 365 Days Receivable (Sales) Outstanding (DSO) Days Payable Outstanding (DPO) Cash Conversion Cycle (CCC) Average no of days a company takes to collect revenue after sales DSO = (Account receivable / Sales) X 365 Average no of days a company takes to pay its suppliers DPO = (Account payable / Cost of goods sold) X 365 Length of time to convert resource inputs into cash flows CCC = DIO + DSO - DPO

13 Facing Corporate Treasurers Cash Flow & Funding Sales = 10,000 Cost of goods sold (COS) = 8,000 Account receivable = 650 Inventory = 3,200 Account payable = 1,000 Days Inventory (DIO) = Inventory / COS X 365 = (3,200 / 8,000) X 365 = 146 Days Days Receivable (DSO) = Account receivable / Sales X 365 = (650 / 10,000) X 365 = 24 Days Days Payable (DPO) = Account payable / COS X 365 = (1,000 / 8,000) X 365 = 46 Days CCC = DIO + DSO DPO = 146 + 24-46 = 124 days < 10,000 X 124 / 365 3,400 > Is it possible to have negative CCC?

15 Facing Corporate Treasurers Constraints SEPA Single Euro Payment Area Regulatory and tax Resources Systems and process Internal policies For example, many markets in Asia Pacific are highly constrained and regulated. No common currency (unlike Europe: Euro) No integrated banking or clearing system (unlike Europe: SEPA) Wide range of operating environment combined with diverse regulatory constructs Central bank regulations, exchange controls and tax regimes Ever-changing regulatory environment

16 Facing Corporate Treasurers Constraints LCY / FCY Local Currency / Foreign Currency FX Foreign Exchange Easy Somewhat challenging Challenging Tax free environment Free convertible currencies Minimal regulations on inter-company loans Stable regulations Examples : Hong Kong, Singapore, Australia, Japan, New Zealand Limitation on LCY cross border movement but no restriction on USD/ EUR/ FCY Some regulation on pricing, intercompany loans Restrictions on non resident accounts Examples : Malaysia, Indonesia, Philippines Restricted FX Limits on cross border transactions Restriction on interest payout Heavy regulation, lots of documentation, reporting etc. Frequent regulation changes Non-resident restrictions Limited investment options Examples : China, India, Vietnam, Thailand, Korea, Taiwan Constraints in liquidity management

17 Facing Corporate Treasurers Constraints Tax Stamp duty Capital tax Controlled foreign company legislation Thin capitalization Transfer price rules Withholding tax rules Tax on loan capital or credit agreement for long term borrowers Funding a subsidiary may result in overstating their asset value, inviting higher capital taxes Tax on passive income earned by foreign subsidiaries in lower tax countries. Specific debt to equity ratio. Once exceeded, interest considered as dividend and subjected to tax. Transactions not at arm s length may result in income tax adjustment When a company makes a cross border payment, typically of interest, dividends or royalties. It may be required to withhold an amount and pay to the domestic tax authority. Constraints in liquidity management

Transaction Bank s Approach Solutions (Chart 1) SSC Shared Services Center H2H Host to Host Strategic goal Customer issue Solution Efficient Working Capital Cash Conversion Cycle Payables Inventory Sales (Receivables) Poor payment terms Poor payable practice Poor invoice terms (Delayed payments) Poor credit control Insufficient resources for collection Extend terms Payable finance Process review / SSC Consolidated payments H2H Shorten terms Offer discounts Receivable finance Review credit controls Trade products Add resources Free up resource Virtual accounts Various collection solutions 20

Transaction Bank s Approach Solutions (Chart 2) TMS Treasury Management System Strategic goal Customer issue Solution Visibility No timely data Multi bank reporting Consolidated reporting Efficient Working Capital Cash Conversion Cycle Control Poor forecasting No tools to control Improve forecasting TMS Transaction & liquidity management portal Efficiency Too many accounts Account rationalization / restructuring Manual process Automated transaction Poor use of cash Automated sweeps Pooling structure 21

Transaction Bank s Approach Transaction Management Company A (Buyer) Invoice Company B (Supplier) Debit Company A Payment Instruction Bank A Payment Message Acknowledgement Clearing House Settlement System Advice Bank B Credit Advice Credit Company B Debit Bank A Account Credit Bank B Account RTGS Settlement Shared Service Center Payment Factory Collection Factory 23

Transaction Bank s Approach Transaction Management RTGS Real Time Gross Settlement ACH Automated Clearing House Country RTGS ACH Cheques Australia RITS-HVCS BECS, BPAY APCS China CNAPS-HVPS CNAPS-BEPS NCIS Hong Kong CHATS ECG CLG India RTGS NEFT MICR Indonesia BI-RTGS SKNBI SKNBI Japan BOJ-Net Zengin Bills & Cheque clearing system S.Korea BOK Wire KFTC KFTC Malaysia Rentas IBG espick Singapore MEPS+ Giro (IBG) SGDCTS Taiwan CIFS ACH, FISC TCH Thailand BAHTNET SMART ECCS & Provincial CCS Vietnam IBPS- HVTS IBPS - LVTS SBV Payment Systems in Asia Pacific 24

Transaction Bank s Approach Liquidity Management Singapore Master Account (Regional Treasury Center) Auto sweep based on the cut-off time balances Source Account Source Account Participating Account Auto sweep based on the cut - off time balances Participating Account (resident account) Country A Participating Account (resident account) Country B 1 Way Sweeping / 2 Way Sweeping ZBA / TBA 25

26 Transaction Bank s Approach Liquidity Management

27 Transaction Bank s Approach Liquidity Management Liquidity Management in Asia Pacific

29 Transaction Bank s Approach Service Menu & Tools

30 Transaction Bank s Approach Service Menu & Tools e-channel (Internet Banking) SWIFT Bank Readiness Host to Host Solutions (H2H)

32 Transaction Bank s Approach e-channel (Internet Banking)

44 Transaction Bank s Approach SWIFT Bank Readiness SWIFT Society for Worldwide Interbank Financial Telecommunication

Transaction Bank s Approach Host to Host Solutions SFTP Secure Shell File Transfer Protocol Customer s System 1. XML 2. CSV 3. TXT 4. TAB Every 5 minutes Option to choose the status : a. To modify in SMAR&TS = Creating b. To approve in SMAR&TS = Created c. To check the status only = Sent ** If there is any missing mandatory field for Creating = Temp Approve Customer SMBC Relay Server Back Office Systems SMAR&TS Server Back Office Systems 45

46 Important Notice This document was created purely for the academic lecture. Nothing in this document constitutes an offer, recommendation, advice, or solicitation or an agreement to provide the scheme described in this document to any person to enter into any transaction or adopt any trading or investment strategy. The information in this document is believed by Sumitomo Mitsui Banking Corporation ( SMBC ) to be reliable, but SMBC make no representation or warranty as to, and accept no liability in relation to the accuracy or completeness of the information or for any opinion expressed herein. This is proprietary document of SMBC, and citation or duplication of this document without permission is strictly prohibited regardless of the purpose. Please do not quote, copy, forward or disclose any or all information of this document to third parties.