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Bridging innovation and resilience: Europe connected
613 Plays4 days ago
How are Europe’s treasurers adapting to a rapidly evolving landscape?
Join Yasemin Artar, Head of Corporate Sales, Markets & Securities Services, HSBC Continental Europe and Marwan Dagher Head of Markets and Securities Services, HSBC Continental Europe, as they discuss the drivers reshaping corporate priorities across the region- From regulatory change and the implications of a Digital Euro to the rising importance of FX risk management and cash flow forecasting.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
Introducing Treasury Management International Podcast Series
00:00:22
Speaker
Welcome to this special TMI podcast series in collaboration with HSBC called Treasury Beyond Borders, Balancing Risk and Opportunity Through Global Growth. I'm Eleanor Hill, Editorial Consultant at TMI.
00:00:35
Speaker
And over the course of this series of podcasts, I'll be exploring how global treasury is evolving amid geopolitical shifts and digital transformation. Across the episodes and with insights from HSBC experts, we'll dive into key themes both globally and across different regions, from managing risk in uncertain markets to leveraging new trade corridors and emerging technologies.
European Treasury Trends and Strategies
00:00:57
Speaker
So today I'm delighted to be joining by two special guests from HSBC. They are Yasmin Atalar, who is Head of Corporate Sales in Europe for Markets and Security Services, and Marwan Dagor, who is Head of Markets and Security Services, HSBC, Continental Europe. And we're going to be taking a look at the latest Treasury Trends across Europe. So there's an awful lot for us to get our teeth into and to discuss, but we're going to kick off with a little look at what the ECB is up to. So Yasmin, it'd be good to get your thoughts on this. We're obviously expecting deposit rate to be cut fairly soon again. Are you seeing European Treasurers adjusting their liquidity strategies in anticipation of continued lower rates?
00:01:37
Speaker
What kind of conversations are you having with Treasurers? Give us a bit of a sense of how they're feeling. Thank you, Elna, for the question. There is definitely a consistent trend among the corporates. So they are prioritizing security and liquidity over yield when it comes to the investment of their excess cash.
00:01:57
Speaker
We are also seeing some changes in terms of the tenor of the investments. They are looking into longer term investments. to look relatively higher yields before the rates go down.
00:02:07
Speaker
However, you know, don't forget frequently desired accounting recognition within cash and cash equivalents assets put a natural cap on the investment utilities up to three months.
00:02:19
Speaker
So it's a bit of a dilemma that the corporate treasurers are going through right now. And also the corporates trying to diversify on the back of the concerns around the counterparty risks.
00:02:29
Speaker
That plays a big role. So that's why we are seeing a bit of a shift around the security issues. you know, what are the securities I can use. So the treasurers are looking into repo and reverse repo agreements. So we have, for example, at HSBC, the agency repo program.
00:02:45
Speaker
What does it mean? It means a single counterparty like HSBC acting as an agent, centrally sourcing and allocating securities. And, you know, that brings a lot of operational and documentational efficiencies for the customers.
Impact of Economic Conditions on Treasury
00:03:01
Speaker
So the client doesn't need to sign various Jimbrough agreements with a number of counterparties after weeks of negotiating the documentation. The agent does it all for them.
00:03:11
Speaker
So it's overall, it's the security and liquidity, I would say, are the biggest concerns. Yeah, it's very interesting what you said there. And I remember when I first started writing about corporate treasury, which was far too long ago, one of the first things I wrote about was repo. And it was just so underused back then. But same as you, in the last few months, I've had a number of corporates talk to me about repo and wanting to find out more. Also, so it's interesting to see that trend developing. And like you said, there's so many things to consider, all of that diversification, where you should be with your yield, what you should be locking in.
00:03:45
Speaker
And on the topic of locking things in, Yasmin, let's talk a little bit around the favouring fixed rate debt or otherwise what's going on. Are you seeing people shift back to the variable rate instruments, because we've looked at the investment side of things. So let's shift to the liabilities for corporates.
00:04:02
Speaker
Tell us about what treasurers are up to in terms of how they're thinking about their debt. You know, moving into the liability side, there are two ways where the corporates are looking into it. So they can look at from a funding side, directly yeah utilising fixed rate funding by tapping the capital markets.
00:04:20
Speaker
Or alternatively, they can create it synthetically by using the hedging instruments. So I have seen a number of corporates doing either or both of them at the same time. You know, first of all, if they are tapping new funding, they go either the capital markets or they use bilateral bank loans. And it's interesting, capital markets for corporates have been dominated by fixed rate. It's only 4.3% of new euro-denominated corporate issuances have been on floating rate.
00:04:49
Speaker
It's very minimal, very low. And in terms of the bilateral bank loans, they tend to have a shorter tenors and are typically structured with floating rates. Maybe, you know, corporates are compensating with that a bit, using more bilateral loans.
00:05:05
Speaker
Marwan, maybe would you agree with that? Yeah, i mean, look, considering all general funding options and in our conversation with clients, most corporates appear content to adopt a wait-and-see approach regarding the ECB.
00:05:16
Speaker
So for short-term funding, it's preferable to remain on floating rates while policy rate cuts are being implemented. So the treasury teams adapt to trade realignments and geopolitical tensions. For example, in Asia, aside from China and India, growing interest in capital injection and hedging activities, for example, Vietnam and Malaysia, are norm.
00:05:33
Speaker
In several emerging countries, they understand that the lower labor cost is no longer sufficient to attract multinational investments. This is why they are launching schemes to make that currency more available for multinationals. Because as number of multinationals share their interest to produce more in the US, but equally complain about the scarcity of labor resources,
00:05:50
Speaker
And of course, the higher costs over there. So that's why we continue to see, for example, in Latin America, Mexico and Brazil in particular, to continue to benefit from this reglobalization trend. Yeah, it does make sense. They've got so many things to consider, so many options that they do think about that wait and see is very much, I think, the approach that I'm seeing from many corporates on our side as well. But Yasmin, sorry, back to you. You know, the second part I mentioned is around using the hedging instruments and the arrangements and looking ahead, further cuts, market is pricing it. They would like to continue. And, you know, as the rate cut happens, the yield curve will steepen. And what does it mean from a corporate perspective?
00:06:28
Speaker
it will make the initial period's cost of floating rate cheaper than market fixed rate. So corporates use frequently interest rate swaps to convert the fixed rate obligation into floating c rate in order to reduce the initial carry. And also it's worth noting, it's not only directly plain vanilla interest rate swaps,
00:06:48
Speaker
We are going through a high rates of volatility and uncertainty in the middle of the geopolitics and everything that's going on. So the clients are also looking onto option-based instruments like caps on the interest rate in order to balance a bit of the participation as well as the protection.
00:07:06
Speaker
Oh, there is never a dull moment, that is for sure. Marwan, what would you add to that? Yeah, indeed. There's a lot to say about Look, in terms of what Yasmin has said, and some corporates that previously swapped their debt from fixed to floating rates are satisfied with their position and are waiting for the next ECB meeting before making further decisions.
00:07:23
Speaker
However, we are seeing an increasing number of discussions with corporates who have hedges in place where they pay a fixed rate. Because as the ECB approaches the end of its rate cutting cycle, there's growing interest in extend and blend structures.
00:07:35
Speaker
These allow clients to take advantage of low long-term rates and reduce the average fixed rate of the hedges. Because at the end of the day, European treasurers are not speculators.
Geopolitical Tensions and Treasury Operations
00:07:44
Speaker
yeah So with ECB inflation target at 2%, we see many clients fixing interest rate at that level, plus or minus their credit spread.
00:07:50
Speaker
Yeah, they make sense. And like you say, you definitely do not want a treasurer to be a speculator. but We touched on the trade realignments, the geopolitical tension. So let's talk a little bit about how those shifts are impacting treasury teams because they're having to think about things like nearshoring and their companies are looking at supply chain restructuring. So what do treasury teams need to be thinking off the back of that?
00:08:14
Speaker
It's a very tough question. I need to be frank here. It's not easy yeah for the treasurers. It's rather challenging. Treasury teams are increasingly playing a critical role, especially in these challenging times.
00:08:27
Speaker
And they need to be responding to ever-changing trade flows, shifting supply chains. In the middle of all the geopolitical tensions and the current tariff situation, it doesn't make their life easier. and you know, how do they play a critical role?
00:08:42
Speaker
I mean, treasurers are working very closely with the business units to assess the new supplier risk, managing working capital, ensuring especially liquidity. Liquidity becomes a big concern as well when it comes to the new markets.
00:08:57
Speaker
And, you know, if I look, what does it mean from a treasurer's day-to-day role perspective? How does it impact them? They need to be opening, setting up new banking relationships, adapting cash management structures, enhancing effects risk management, also to deal with increased currency volatility and also even changing exposure profiles. So the wider impact on the treasury operation of what's going on in the world right now is quite significant.
00:09:25
Speaker
And also, we should not underestimate the supply chain challenges. You know, the treasuries are focused on getting real-time visibility and having cash flow or forecasting issues.
Emerging Trends in Global Treasury
00:09:37
Speaker
Maybe, you know, Marwan, you were recently at the HSBC Global Investment Summit in Hong Kong, ah right? A few months ago with so many high profile investors, corporates and regulators.
00:09:48
Speaker
Did you guys touch upon this one? What were the main themes? Yeah, yeah, yeah, we have. Absolutely. ah Look, at what a yeah I was there at a conference it was. But yes, the the theme really came alive during the the com the investment summit where re-globalization was a key topic.
00:10:05
Speaker
It's so interesting though, Marwan, because i I alluded to earlier that I've been in this game for a little while, but I remember I've written about globalisation, de-globalisation, we're re-globalisation. So it's interesting to see where that's going to go and what that means for treasury teams and all of the things that Yasemin has highlighted there. Is there anything else you want to add on that, either of you?
00:10:27
Speaker
Yeah, I think, you know, one thing worth highlighting is around all of these changes are impacting the FX exposure. They are becoming much more complex to manage and treasuries need to hedge across a broader set of currencies and manage risk for more volatile or less liquid markets. Their job is not too easy, I should say that.
00:10:47
Speaker
Maybe the current regulatory environment, the compliance requirements, navigating through the new regulatory ah world is not all easy as well. Maybe to sum up with one sentence, it definitely requires corporates to be more agile and ready to any change. Expect the unexpected, I would say.
00:11:07
Speaker
Oh, absolutely. And we we need to do more to champion corporate treasurers and make people aware of like, actually, they're doing so much behind the scenes. Come on, give them a bit more credit than they get sometimes. and Let's talk a little bit about technology, because there's so much going on there as well. It's moving so so, rapidly. So what are you seeing in terms of the tech that's most valuable for European treasury teams? You know, they're often thinking about forecasting, that's always top of the list and they've got things like compliance, but they also need to be really agile. So there's a lot of conflicting things that they're looking for.
00:11:42
Speaker
Are you seeing real time treasury actually coming to the fore? We've been talking about it for a little while. And are you seeing Europe as a proper hotbed of innovation? Because it's not necessarily always discussed as such. right You know, when we talk about these things, it's quite often looking at APAC for that kind of innovation. So what's your view now on where we are in Europe?
00:12:01
Speaker
Look, the world is changing fast and definitely the corporate treasuries are adapting to it. So real-time tools, as you mentioned, they're gaining momentum with the implementation of APIs. The adoption of AI is on the rise.
00:12:13
Speaker
In fact, thanks to HSBC extensive risk management survey carried out only last year, about a quarter of European treasuries have already implemented AI in some form, with only about one-tenth saying they're unlikely to engage with AI in the next five years.
00:12:27
Speaker
So clearly that's a significant shift here. Looking further into the detail behind the implementation of artificial intelligence, there is a clear focus. Interestingly, 82% are applying AI to data collection and analysis. And when looking specifically at European treasuries, you know, talking about the hotbed of of innovation,
00:12:45
Speaker
AI for cash flow forecasting was highlighted at more than half compared to just 31% in the Americas. So this shows that real-time treasury is definitely coming to the fore with no evidence that European teams are lagging behind other regions, with in fact the opposite potentially being true.
00:13:01
Speaker
So we are adapting to this with our market-leading tools such as ai Markets, where clients can obtain analysis on market actions, liquidities, volatilities, research in just a few seconds. Oh, yeah, that's interesting, Laura, and all of those stats and that the real time Treasury is very much up there. And it helps with things like the separate limits on the instant payments being taken away. And all of that will make a big shift, hopefully coming down the line.
00:13:26
Speaker
Yasmin, anything you'd like to add here? Yeah, I just want to share a great example with a client example, how we use AI in the day-to-day operations and how we use actually HSBC's tool AI markets.
00:13:39
Speaker
So around this time last year, it was ah one of the FOMC days. Later in the afternoon, one of our clients, they called us, they said, we have a sizable execution. It was more than half a billion execution in a quite ah emerging market currency pair. The market was almost coming to a close. And we were thinking yeah like in the previous times, what we would have done, we would have spoken to the trader, get the pricing and that will be it. But now given we have access to all the tools and the AI markets make our life easier, we were able to extract and compare the liquidity conditions of the market on the day and compare it with the previous month's liquidity data as well.
00:14:21
Speaker
And we have actually given the AI markets to the client as well. They can investigate and look into them themselves as well. And it worked out extremely well. They made a decision on execution strategy, based on an informed data and analysis of the liquidity condition at the time. And they were extremely pleased how it went.
00:14:41
Speaker
So it was a great example how we used AI and our tool that we develop develop on the trading floor for the benefit of the clients. Yeah, absolutely. It makes a huge difference. And it's nice being able to take your own tools and then, like you say, redirect them for clients. And it sounds like the client quite enjoyed using it as well. It was probably quite a fun experience to have all of that AI to assist them.
00:15:04
Speaker
We have also our real-time hedging tool we developed, which is AutoHedge. And maybe i mentioned about that one as well. AutoHedge is an outsourced and automated FX execution platform, as its name says. It's the auto hedge, you know, where clients still retain control because that's one of the key concerns of the clients. They don't want to let the machine do everything.
00:15:27
Speaker
It's still a retain control over trading decisions and can monitor the performance of the portfolio for also so internal reporting purposes, especially helpful for any clients operating under a pre-agreed hedging policy formally or informally.
00:15:44
Speaker
But that works really well. Yeah, it makes complete sense. And like you say, it it automates things, but there's still a human in the loop and there's still that ultimate decision making power. So it's just making life easier. And yet you've still got that control, which is so, so important.
00:15:59
Speaker
Yasmin, where else are you seeing big adoption of tech among European corporates? We've talked a lot about AI. What about things like APIs? To be honest, the biggest move so far has been of the adoption of APIs. I mean, the treasurers have been trying to learn around the AI, but the adoption hasn't been as fast. So they need to think from a control perspective and compliance perspective as well.
00:16:23
Speaker
But what are the APIs? APIs are like technological solutions allowing different systems to communicate and operate efficiently with each other. And the corporates are using it both internally and externally. Internally, they use it to streamline the processes by connecting different internal systems.
00:16:43
Speaker
And externally, the corporate treasury can connect to external solution providers, especially we see it when it comes to FX derivatives. And having said that, you know, we see also a lot of interest AI, especially the European treasury teams are aiming to improve forecasting and analyzing big data. And ai shines on big data, as we have seen in AI markets.
00:17:06
Speaker
Absolutely. So much critical. It's crucial around data and having the right data and the right time, especially when you're using things like
Digital Innovations in Treasury Management
00:17:14
Speaker
AI. But moving away from that for a moment, Marwan, I wanted to come to another trend and that we're hearing a lot of chatter around among the corporate treasurers. They're thinking about how they need to prepare.
00:17:25
Speaker
And that is the digital euro. It's been kind of gaining momentum, this discussion over the last few years. So what potential impacts would you say that this could have on your European treasury operations and those cross-border transactions?
00:17:37
Speaker
Yeah, well, look, you know, the digital euro poses a significant scaling challenge. Currently, about 9% of money in circulation in the M0, with the remainder being commercial bank money.
00:17:48
Speaker
This is a challenge when we seek to meet the demands of both trade and cross-border payments. You have cost implications. So according to the digital euro cost study, DBF, the estimated cost for banks to connect to the system would be approximately 110 million euro per bank. So that's quite um like large, yeah. Wow.
00:18:03
Speaker
Yeah. There are also geopolitical divergence, fragmented geopolitical approach to CBDCs. For example, the US is generally anti-CBDC. The UK is focused on tokenized deposits and the EU is actively pursuing CBDC.
00:18:16
Speaker
So these diversions could complicate cross-border transaction and interoperability. ah So the treasuries are facing four types of challenges which they need to grapple with. Regulatory adaptation, technology integration, interoperability, so ensuring seamless interaction between CBDCs to organize deposits and traditional money would be critical.
00:18:34
Speaker
Liquidity fragmentation, so treasuries may face challenges in managing liquidity and cash reserves. As the digital euro could impact existing liquidity tools and frameworks. However, you know, these are the challenges, but there are clear potential benefits. For example, streamlined payments, cost efficiencies, specifically for cross-border payments, enhanced transparency, real-time tracking and reporting capabilities, programmability, the ability to embed rules and conditions and into payments, which is why the success of a euro CBDC will hinge on its network effects, scale and inter interoperability,
00:19:06
Speaker
While the premise of streamlined payments and cost efficiency is compelling, significant challenges remain before these benefits can be realized. Plus, you know, mentioned of costs high costs. So for treasurer, understanding how the digital euro interacts with existing liquidity tools and framework will be critical for effective operations.
00:19:22
Speaker
Absolutely. Again, lots more to think about, but the programmability angle is so, so interesting. i've been having a few conversations with treasurers around that recently, not just the CBDC, but the stablecoin side of things. And yes there's a lot of potential there if you've got some set parameters that you can execute against.
00:19:39
Speaker
But we could do a whole podcast on that alone, Marwan. move on I know we've got so much to talk about but so maybe just a final question to you both because it'd be interesting to hear your thoughts so if you were a treasurer you were building a team from scratch in Europe today what kind of capabilities would be non-negotiable for you given everything we've discussed what kind of skills are you seeing rising and important that maybe we weren't even thinking two you or three years ago? know it's a bit of a tough question, but Yasemin, maybe you can go first.
00:20:14
Speaker
Actually, it's an excellent question. If I were building a treasury team from scratch in Europe today, you know, focus and capabilities definitely on FX risk management and cash flow forecasting.
00:20:26
Speaker
These are, in my view, non-negotiable ones and they remain also the top priorities. And the data really backs this up. So referring back, you know, Marwan has given some statistics from HSBC's risk management survey in the past. Like looking at the survey, more than half of the treasurers say FX risk management is the most important area for their function.
00:20:51
Speaker
And they said around the similar levels about cash flow forecasting and monitoring. And also, they are not just the priorities. They are also the most time-consuming parts of their jobs.
00:21:03
Speaker
Hence, the focus on AI and digital skills, they will be gaining more ah momentum. Marwan, do you have anything to add on that? Yeah, well, look, at digital skills, especially automation and analytics, are no longer optional.
00:21:16
Speaker
With AI saving time and helping to reallocate it to what matters most, right? Yeah. I mean, they are definitely rising in importance, even just compared to a few years ago. And when I speak to the corporate treasurers, they would like to understand what we do and how we use AI within the bank itself. yeah So they are quite curious.
00:21:35
Speaker
I'm sure they are. And they'd love to know what you're what you're doing, what amazing projects you've got on. And then they they like to know about things like helping with detecting fraud and all the monitoring, but also the, like you said, the AI markets project. There's so much to learn from that and then applying it to to clients as well. So yeah, a a lot of interest on both
Future of Treasury Teams and Conclusion
00:21:55
Speaker
sides.
00:21:55
Speaker
Anything else you want to add on that or Marwan, do you want to comment? I couldn't agree more with Yasmin. FX risk management and cash flow forecasting are non-negotiable core capabilities. But if you're building a future-ready team, you can't ignore the rapid rise of digital and AI skills.
00:22:09
Speaker
They are no longer nice to have. They are quickly becoming essential. AI is not only an accelerator of capability and skills treasurers already have in-house. It's also a great way to free up time for your talents to focus on qualitative analysis.
00:22:21
Speaker
Just consider what we do personally when we use, you know, ChatGPT and others, how much time we save now in our day-to-day. So the the same for the treasurer, obviously using this in a wider corporate way. So refocusing on research to be able to explain and understand market is equally important.
00:22:36
Speaker
So as treasury teams will increasingly save time by executing tasks via AI tools, they'll be able to invest this time in research to better understand markets, identify opportunities, and focus on overcoming challenges. So exactly what is needed when you have to deal with a very financial crisis or operational shift and supply chain restructuring in response to geopolitical tension, which is, you know, of the life that we've been living in the last few months.
00:22:59
Speaker
Yeah, it's certainly not unusual for there to be an awful lot going on. But like you say, you don't want your skilled team to be just spending time re-keying data and into spreadsheets and doing all of that drudge work, the manual work. You want to free them up so they can really put their brains to to use. And that's the brilliance of automation and AI.
00:23:19
Speaker
Well, thank you both ever so much for coming on the podcast and sharing all of your insights. It's been great to hear from you. And thank you for all of those Ridley Practical examples as well. So that's a wrap for this episode of Treasury Beyond Borders. Thanks to everyone for tuning in. I hope you enjoyed the discussion.
00:23:37
Speaker
And be sure to subscribe and stay updated on our coming episodes. And also watch out for the articles accompanying this series. And for now, thanks again to our excellent speakers. And thanks to everyone for listening.
00:23:49
Speaker
Thank you, Eleanor. Thank you, Eleanor. Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.