Security and liquidity remains a priority
Barclays Director Joanna McArdle considers the problems caused by sitting on large corporate savings.
Northern Ireland businesses are now sitting on the greatest stockpile of corporate cash in recent decades. In fact, according to Treasury statistics, corporate deposits in the UK have grown from £220 billion to a record £770 billion in the last 10 years and now sit at around half of the UK’s annual GDP*.
The reasons for this cash build up are myriad but one factor is clear: with economic uncertainty seemingly the new norm, Northern Ireland businesses across all sectors have become significantly more conservative. Indeed, over the past four years it has been much easier to say no to major investment, no to ambitious growth plans and, conversely, yes to building up cash as a buffer to protect operations if things were to take a major turn for the worse.
For corporate treasurers, risk is a greater concern than ever before. While the overriding goal of recent regulatory reforms, such as Basel III and the Vickers report, is to reduce risk in the banking system, the threats arising from the Euro zone crisis have meant the management of an organisation’s cash flow and liquidity is of even greater importance than in previous times. Given their concerns around counter-party risk, companies looking to balance security, liquidity and yield are therefore prioritising security.
This risk-conscious stance is affecting business’ investment behaviour and is leading many to update their treasury policies. Increasingly companies are also placing greater emphasis on their banking relationships, ensuring they have appropriate support in place. But while risk is a top concern, innovation in the world of bank deposits is offering companies some new opportunities.
For companies that have been able to amass cash, the ability to access it readily remains vital. Liquidity management is one of the key issues for corporate treasurers today, with accurate forecasting essential in maximising cash returns while allowing businesses to access this cash as soon as there is a need for it.
Once security and liquidity have been met, the focus for any good treasurer will still be how best to make their money work for them. Yield may be a lower priority, but in the low interest rate environment, opportunities for additional yield are still worth considering. Most treasurers aren’t willing to lock in funds for 12 months, so product innovation from banks has focused on offering more flexible solutions that match enhanced yield to the behaviour of the account.
Treasury policies are regularly being reviewed in light of products on offer. A recent example is a Barclays NI corporate client that had imposed a maximum three months term on all bank deposits. The rate offered for 100-day notice deposits was significantly better and the treasurer approached the board to secure authorisation to increase the maximum period in order to benefit from the higher yield.
There is increasing concern around the effect that building cash is having on investment and growth. Investment in the UK remains subdued and Chancellor Osborne has been looking at various ways to encourage companies to loosen the purse strings. How risk adverse corporates remain over the short to medium term is one of the great economic questions of the day. What is clear is that, for the foreseeable future, treasurers and their treasury policies will continue to be a topic of focus.
Joanna McArdle , Director, Barclays Bank Plc
Email: Joanna.mcardle@barclays.com
Tel: 028 9088 2912
*Source: Treasury Strategies UK & Eurozone Corporate Cash Briefing, May 2012
Barclays is the trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority (FSA No. 122702). Registered Number is 1026167 and its registered office 1 Churchill Place, London E14 5HP
