Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
Speaker: Thank you for listening.
Speaker: Welcome to the Rethinking Treasury mini-series, where we analyze the changing role of corporate treasury today and the road ahead for corporate risk management.
Speaker: In June and July 2021, HSBC and Acuras partnered to survey CFOs and treasurers across the globe to find out how corporate risk management was evolving to meet the challenges of today and build resilience into the future.
Speaker: A full report titled Rethinking Treasury, The Road Ahead, covering the trends emerging from the survey has been recently published.
Speaker: You can find a link to access this report in the podcast description.
Speaker: In this series, HSBC is bringing together key experts to discuss the main themes arising from the survey in more detail and discover just what drives CFOs and Treasurers today and how those themes will impact their work tomorrow.
Speaker: Welcome to today's episode, where we're going to discuss the key themes and insights emerging from our survey data.
Speaker: We'll be taking a look at the changing role of the corporate treasury and the road ahead for CFOs and Treasury risk managers.
Speaker: Thanks for tuning in.
Speaker: My name is Holger Zeuner.
Speaker: I'm the head of HSBC's Corporate Sales Thought Leadership Team for EMEA, and today I'll be talking with Rahul Badrha and Paul Meckl.
Speaker: Before we start, let me quickly introduce our experts.
Speaker: Rahul Badrha is global head of corporate sales, responsible for all sales activities to corporate clients on the public side of HSBC's market business.
Speaker: He's been with the bank for over 20 years, initially starting his career with HSBC in Mumbai.
Speaker: Paul Meckl.
Speaker: is the global head of FX research and is based in Hong Kong.
Speaker: HSBC's global FX research team is highly regarded, in particular for its comprehensive analysis of emerging market currencies.
Speaker: It is highly ranked in corporate and institutional surveys.
Speaker: Paul has been a financial markets analyst for more than 20 years and joined HSBC in 2006.
Speaker: Thank you.
Speaker: Thank you very much.
Speaker: Now let's get started with the first theme.
Speaker: Our survey threw up a lot of interesting insights into how CFOs and Treasuries are interacting and what their risk focus looks like today.
Speaker: So some first data for our audience here.
Speaker: 82% of CFOs overall agreed that the role of Treasury has shifted significantly during the pandemic.
Speaker: And as a first question to both of you, how do you see this evolution and is there still more work to do?
Speaker: Raoul, maybe you want to go first?
Speaker: Absolutely, Holger.
Speaker: I think what treasurers do has become even more critical.
Speaker: What's happened with the last couple of years, the external environment has changed dramatically and it's changed dramatically across a number of parameters, whether it's geopolitics, whether it's supply chain, whether it is the kind of tail risk events that we've seen, and whether it's the impact of climate change.
Speaker: And all this requires the treasurer to look at the traditional KPIs and goals and measures with a different and often through multiple lenses.
Speaker: So for me personally, the one area where I think more attention needs to be paid and more needs to be done is ensuring that treasurers are not only involved right from the very beginning, but are actually an integral part of strategic discussions within the organization as they look to the future.
Speaker: That is absolutely a must.
Speaker: I think that involvement from a strategic perspective and a forward-linking perspective is absolutely critical.
Speaker: That's what I would say.
Speaker: Paul, anything to add?
Speaker: Well, I think you're absolutely right that there's been a lot of stress testing over the last year as well.
Speaker: If we go back to the shock in March 2020, when there was suddenly a lack of dollar liquidity in financial markets, we could see just how disruptive it was and disorderly it was
Speaker: at times in the currency market.
Speaker: And I think that, again, I think it emphasizes the role of the corporate treasurer in terms of managing these uncertainties.
Speaker: And perhaps there has been some calmness in some ways coming back over the last couple of months, but there's still
Speaker: you know, what I would argue are plenty of uncertainties ahead and trying to steer through this uncertainty is going to be quite difficult.
Speaker: So that means maintaining a closer sense of what's actually happening in the markets day to day is required.
Speaker: You know, we can't just take an easy ride and think everything is going to be fine because I don't think that's going to be the case.
Speaker: Thank you both.
Speaker: And I think that high importance of communication between CFOs, treasurers and underlying businesses clearly came through our survey data, as well as the alignment of the vision of a more strategic setup.
Speaker: But there's also a sense here and there that the near term focus of treasury might at times still be too narrow and different from CFO expectations.
Speaker: Rahul, is that something you would also agree with?
Speaker: Absolutely, Holger.
Speaker: You know, meeting a number of corporates, I do get a sense that at times you will meet treasurers who focus is very narrow.
Speaker: And honestly, I think it all boils down to what are the goals and measures against which the treasurer and the treasury function is being evaluated.
Speaker: And my recommendation or suggestion to a CFO is if you think that their focus is very narrow, it's very short term,
Speaker: Very simple, just alter the KPIs for your treasurer and what your expectations are for the treasury team and they will deliver.
Speaker: Now, at times this might mean that you need to alter the job description and get maybe a different candidate or team with slightly different experience, but it is all within the control of the CFO.
Speaker: And most of the times, you know, on the odd occasion when a conversation has been had with a treasurer where, you know, clearly there's a risk on the horizon where they should be focusing, but it's not something they are.
Speaker: You know, the common response that I have received has been, well, it is not within our mandate.
Speaker: It is something that the CFO will look at.
Speaker: So very easily addressable, at least in my view.
Speaker: Thank you, Rahul.
Speaker: So with that, let's move to the next big theme and something nobody could really escape from.
Speaker: So there's an obvious dent which the pandemic has left for many businesses, and it's still impacting a wide range of corporate activities.
Speaker: And if we just go through the newswire these days, there's a lot talk about commodity shortages and supply chain congestion still lasting or even worsening at times.
Speaker: And this also ties in with our corporate responses.
Speaker: So we heard from 78% of CFOs.
Speaker: that they've moved supply chain and logistics centers closer to customers as a reaction.
Speaker: And related risk on supply chain still went near the top of the agenda for them in 2021.
Speaker: Paul, when you look into the big picture for trade developing, how is that and how is also the pandemic still impacting the outlook?
Speaker: Well, I think it's very much still impacting the outlook and probably more so than what people were thinking
Speaker: you know, a few quarters ago, I mean, if we go back towards the end of 2020, many people were hoping that, you know, the signs of optimism were going to be coming through and with a vaccination rolling out through the world, that maybe we could breathe a sigh of relief.
Speaker: But as you rightly point out, there's been other problems surfacing along the way.
Speaker: And I think that these bottlenecks are still very much evident in impacting many different corporates, but also economies.
Speaker: And it's not just about
Speaker: shipping rates or disruption with regards to certain products, you can see it through another angle that can come down to labor shortages in specific sectors.
Speaker: And these are all issues which are clearly very challenging for a number of corporates.
Speaker: I do think though that probably as time progresses, things will improve.
Speaker: I mean, we have to be optimistic about the longer term outlook, but that kind of degree of scarring in terms of how things were impacted so negatively
Speaker: in 2020 is still gonna be there for some time.
Speaker: And it also implies that the global economic recovery will probably still be very much an uneven one.
Speaker: My final point too that we have to bear in mind, and I think maybe it caught a number of people off guard, is that when you think about COVID and then suddenly there was a new variant that proved to be quite challenging, the Delta variant,
Speaker: We could see the, again, the ramifications for many different countries in terms of sequencing over the last couple of months.
Speaker: That's got to sit in the back of minds of corporate treasurers that this type of risk could still be coming in the months or quarters that hopefully not, but it's always something that we have to think about.
Speaker: Thank you, Paul.
Speaker: And we're moving to you.
Speaker: Supply chain adjustments and the worries about shortages are clearly some things you've heard directly from clients in your conversations recently.
Speaker: What we've seen in our data is also that commodity price risk is the most frequently stated one of the CFO priorities these days and 37% picked the choice.
Speaker: Is that something that surprised you and more so how do you see corporates coping with this?
Speaker: Honestly, not at all totally surprised.
Speaker: If I look at what's been happening in the commodity markets ever since the disruptions we saw in March last year, to use Shakespeare's term, it's both a comedy of errors and it's definitely not a Midsummer's Night's Dream.
Speaker: And then prices have been extremely volatile.
Speaker: And also in many instances, not only has there been volatility, but there have been sharp rise in prices for a combination of factors.
Speaker: You know, Paul talked about some of them, you know, whether it's supply chain, whether it's the weather, whether it's, you know, linked to the pandemic or recovery from the pandemic.
Speaker: And as consumers of commodity or suppliers, you know, corporates need to deal with not only rising prices, but also equally important is the certainty of supply, right?
Speaker: Because that is absolutely necessary to maintain a going concern.
Speaker: Now, risk management around the impact of commodity prices in terms of, you know, how it's impacting the bottom line is definitely getting more attention and more focus.
Speaker: Clients are trying to extend the duration of their purchase agreements along with trying to agree longer term pricing, just to try and avoid volatility.
Speaker: But for some clients, it is not just about commodity risk.
Speaker: Foreign exchange also becomes relevant because, as we all know, most of the commodities are invoiced in US dollars.
Speaker: But the balance sheet currency for a number of our clients, especially in the emerging markets, is not US dollars.
Speaker: So that's an added complexity.
Speaker: And if you're paying more for a commodity in dollars, that means your FX risk is also increasing, you know, for the same quantum, physical quantum.
Speaker: But clearly, as we have seen, you know, with the recent bout of energy prices and, you know, the disruptions we've seen in Europe, there is always the element of surprise.
Speaker: You can never, ever be fully prepared.
Speaker: So I think we have to, you know, hope for the best.
Speaker: Thank you.
Speaker: Thank you, Rahul.
Speaker: And as you already touched on FX or the interrelation between commodity prices and FX,
Speaker: Overall FX is obviously the key market risk which every corporate with an international business model is somehow exposed to it.
Speaker: What was highlighted in the survey are that there are still larger challenges to mitigate the full extent of FX risk efficiently.
Speaker: There's a data here, 57% of CFOs said they suffered lower earnings over the past two years due to some unedged FX risk.
Speaker: That despite some adjustments being made and that number being a couple of percentages lower than it was in our initial survey in 2018.
Speaker: Mahul, if you look into your perspective, how is that fixed risk management?
Speaker: How has that changed over the past couple of years?
Speaker: And also, what more is required to make better use of the tools available?
Speaker: Well, I'll probably start by stating the fairly obvious, right?
Speaker: As a corporate, I think what is firstly, absolutely critical is understanding what elements of your business even have an exposure to foreign exchange risk.
Speaker: Then it is, is that risk, do we need to be worried about that risk?
Speaker: Because there may be a risk, but we need to quantify that risk and need to quantify the impact of that risk on the bottom line on any metric that is considered absolutely imperative from an investor perspective, a shareholder perspective, a rating agency perspective.
Speaker: And once we've determined what are the risks and which are the ones which we, from a quantification perspective, need to manage, then it boils down to managing the risks that are significant and determining what is the best strategy for the company based on the risk return metric.
Speaker: Now, as we all know, there is no perfect hedge, right?
Speaker: So what I have seen in terms of the changes over the last few years, firstly, very plain and simple, more focused on the subject.
Speaker: And that has resulted in definitely more conversations around risk management and having a policy framework where one might not have existed.
Speaker: So the element of just leaving things to chance and hoping for the best is definitely now a reducing philosophy.
Speaker: I think also we've clearly seen clients reducing the duration of their hedges, both on the cash flow and balance sheet hedging side.
Speaker: And there are various logical reasons for it, you know, depending upon the sector in which the client is based.
Speaker: This could range from, you know, freedom in terms of pricing, it could range from freedom in managing volatility and underlying sales forecast and linked to that.
Speaker: We've also seen clients starting to think about more about a balance between, you know, simple forwards
Speaker: and optionality as far as the hedges are concerned.
Speaker: Now, obviously some clients might get that optionality by just lowering or increasing the hedge ratios, but clearly option structures are finding more favor with clients to bring that, I guess, flexibility into their risk management.
Speaker: And like I said at the very beginning, I think it's very important to point out that there is no perfect hedge.
Speaker: So if there is an expectation that year after year, there will be consistently positive results delivered from any hedging policy, I just don't think that exists.
Speaker: So as long as something works within the framework and the parameters, I think if it ain't fixed, if it ain't broken rather, don't fix it.
Speaker: But at the same time, keep your eyes open and ears close to the ground because this world is ever changing.
Speaker: What's happened in the last two years is definitely making some clients think about their risk management policy for the future.
Speaker: Thank you, Rahul.
Speaker: I think you touched on a lot of really important points here, starting with the policy document and also the need to review in a clearly changing macroeconomic environment.
Speaker: Paul, obviously...
Speaker: You and your team, you're very closely following the changing dynamics of FX markets around the world and also around the clock.
Speaker: Given that in recent years, the focus has rotated among cyclical, structural or even political drivers dominating at times, where do you see the recent macro data fit in and what is the changing or potentially changing role of central banks also as impacting FX looking forward?
Speaker: Well, before I try to answer that question, I'm going to circle back to one of your earlier questions, which fits in with what Rahul was just saying.
Speaker: I think this reference about how structural trends have actually been changing over the last couple of years and supply chains as well, this matters in the FX market.
Speaker: We can see that how direct investment...
Speaker: is being reallocated to some countries more than other countries.
Speaker: And these are probably, again, highlighting about how supply chains are changing and that how corporate treasurers are thinking about contingency plans to navigate these uncertainties going forward.
Speaker: So I think that there's some very important structural themes there that are not going to be going away anytime soon.
Speaker: And again, I think about that a lot in terms of the impact on specific currencies, for example.
Speaker: Now the second part of the question with regards to the macro data and how are we thinking about it at the moment?
Speaker: Well, undoubtedly this year it's been astonishing.
Speaker: The volatility in it has been exceptional and I think that's been quite confusing for many financial market participants, for those that need to manage risk.
Speaker: And it's not just about market participants, I think it's central banks.
Speaker: At times you see indications where labor market reports are very robust, and then at the next month they're completely disappointing.
Speaker: So it makes it very confusing in terms of guiding us where we think the direction of monetary policy should be heading.
Speaker: Now, that point alone I think matters because going back to this idea about changing drivers, what the team and I have been looking at pretty much since the beginning of this year
Speaker: is how the influences through the FX market in 2020 have been shifting.
Speaker: Last year was very much about the ebb and flow of risk appetite, recovery trade, that was generally putting downward pressure on the US dollar.
Speaker: This year, however, increasingly we're thinking about, well, central banks, could they be looking to try and taper their asset purchases or could they be on the runway
Speaker: to be raising interest rates.
Speaker: That is a kind of a pre-COVID world and that's a very long-term view for us, like multi-quarter that is, but it's a lot more influential than where it was through most of last year.
Speaker: So the data itself is increasingly mattering more, but it's still very volatile because of a lot of the distortion that has occurred over the last year.
Speaker: Thank you.
Speaker: So now let's move to how technology and digitization are affecting corporate risk management.
Speaker: And knocking on wood that technology has helped us today in having stable connections across this session.
Speaker: But there's been a very strong trend towards wider use of technology within corporate treasury.
Speaker: And clearly many expect this trajectory to continue.
Speaker: What our survey found is that 81% of CFOs are viewing the digitization of treasury processes has become far more important over the past three years.
Speaker: Paul, maybe starting with you here, how much of that do you also see being an impact or consequence from the pandemic about the urgency of digitization?
Speaker: Well, I think there's been a huge impact from it and that's also been reported in a number of surveys, etc., that this has prompted central banks to investigate central bank digital currencies a lot more closely.
Speaker: If we go back to April last year, I mean, China
Speaker: was very much highlighting its intent to keep testing and eventually launch the so-called eCNY relatively soon.
Speaker: Is that a direct function of the start of the pandemic?
Speaker: I wouldn't necessarily, it's related to that because its studies and design about this has been in place for a number of years.
Speaker: However, it's very clear that other countries did begin to think differently because of the pandemic.
Speaker: know the willingness to use cash suddenly dropped and and I think that this is something about the future I get both contingency planning so I I think that to sum up my view I think it's an essential part of it I don't think it's the only part of why central bank digital currencies are going to be eventually getting rolled out but yes the pandemic has prompted it
Speaker: Thank you, and I think that evolution of central bank digital currencies is going to be very important for our corporate client base to follow as well as they might need to adjust their systems to be able to work with those new currency codes and setups.
Speaker: In terms of the impact of the pandemic, we all certainly experienced this with our work-life shifting from offices to remote working for a large part or in some reason for all of the past 18 months.
Speaker: Besides that urgency, there's also an expectancy of more efficiency and growth coming out of digitization.
Speaker: Let me throw up a couple of data points here.
Speaker: We have seen 53% of CFOs expect a large boost to their business model from further digitization.
Speaker: Even 97% are looking for blockchain technology as a mean to increase the efficiency and auditability of their financial processes.
Speaker: Here trade documentation, payment security, but also an improved integration of FX risk into automated processes.
Speaker: Those are seen as the main use cases.
Speaker: More specifically on the FX side, even today 55% of treasurers are reporting that they predominantly are using electronic platforms now.
Speaker: Clearly up across all regions and business sizes, a bit more advanced in Europe and Western markets towards that.
Speaker: If we combine all of this, there clearly needs to be some further investments on both sides of the connection.
Speaker: And, Bahul, I know you hold a very high personal interest in those developments as well.
Speaker: Where and how far do you see this going?
Speaker: Thanks, Olga.
Speaker: You know, at times the saying is when the going gets tough, the def get going.
Speaker: And, you know, definitely the pandemic has taught in more than one instance that if your plan A and plan B is that, you know, humans will be involved in the process end to end, it's been an absolute disaster.
Speaker: So in a way, a lot of the buy-in for digital and the fascination with digital and technology and the investment objectives that it should drive and I guess the focus and attention around it has definitely changed post the pandemic.
Speaker: And from my perspective, I think what corporate should be thinking about is increased process efficiency, and this requires investment in digital.
Speaker: And as clients, treasury operations become bigger and more complex.
Speaker: Traveling down this road is even more important.
Speaker: Literally every client today in some shape and form, either their consumer base or their supply chain is distributed across the world.
Speaker: And this is only increasing, you know, either in terms of number of countries that they touch or the number of clients that we're talking about or the number of individuals or suppliers in their supply chain.
Speaker: So processes are becoming more and more complex, which means digitization and using technologies like blockchain is an absolute necessity, right?
Speaker: It is not an option.
Speaker: Also, I think given that majority of the clients day to day, on a day to day basis, their foreign exchange is actually linked to their transaction banking needs.
Speaker: What we also need are solutions that allow clients to actually transact seamlessly with banks across payments and cash management, trade finance, and obviously linked to this foreign exchange.
Speaker: And what is equally important is that the days of banks building systems which are standalone and work very well on a standalone basis,
Speaker: are behind us.
Speaker: We have to have systems that link into the client's ERP-owned system so we can both pull data as well as push back data so that it feeds back into the client system.
Speaker: And clearly, you know, we are seeing developments around banking as an infrastructure and banking as a service.
Speaker: And every client needs to start thinking about with their banking partner, how they go down the route of digitization and take advantage of all the technological advancement that banks have made and how it can tie in with their agenda and their view and their vision of the future.
Speaker: But a lot's to be done.
Speaker: And as we know with technology, this is an ever evolving journey.
Speaker: You never reach, you know, the final destination.
Speaker: Thank you, Rahul.
Speaker: Just really briefly want to touch on another mega trend which is evolving, which is ESG, and it's not standing short of digitization.
Speaker: So we see more than 80% of CFOs which are field that ESG by now is very important for the decisions on CapEx, on financial debt, on supply chains, and last but not least, hatching.
Speaker: Rahul, maybe a question for you.
Speaker: How massively do you see ESG emerging from your conversations, and also what needs to be done to execute on those ambitions?
Speaker: So, Olga, I'll try and keep it short and sweet given the time constraints.
Speaker: So I'll probably just talk about the E out of the ESG.
Speaker: And it is the one common theme, I think, in every client conversation.
Speaker: You know, so climate change is definitely a very, very real risk, not only obviously for us as the human race, but the detrimental impact it can have on the client's bottom lines.
Speaker: Stories about flooding around the world and what it has done in terms of shutting down factories, impacting supply chains is fairly obvious now.
Speaker: And clients also need to be aware and take action, be it from a contingency planning perspective or helping deal with the global warming agenda.
Speaker: So I think this is top of mind.
Speaker: Some clients are well into that journey with a proper ESG framework, with commitments, with dates, and in terms of timeframes where they want to achieve certain things.
Speaker: Others are still beginning.
Speaker: But I think the message is now being heard absolutely loud and clear with the corporate world.
Speaker: And I think, you know, the financial community and the corporate world really, really needs to come together to join hands.
Speaker: So we are moving in the right direction from a financing perspective, from a support perspective and from a solutions perspective.
Speaker: Thank you.
Speaker: In one sentence for both of you, what's the biggest agenda item you see for corporates over the next 12 months to fulfill their ambition?
Speaker: Maybe Paul, you want to start here?
Speaker: I'll say hopefully that bottlenecks improve.
Speaker: There's been a lot of supply disruption and if we can get through that, I think that'll be very much a relief to many corporate treasurers in the months and quarters to come.
Speaker: Holger, a longer sentence from me, I would say, so after nearly two years of focus on cost and downsizing and turmoil, I think the next 12 months, the focus should be on energizing for growth and doing this in an environment where the future is unfortunately still uncertain and still complex, but also doing it with recognition that over the past 18 months, our employees, their families and their loved ones have actually deal with innumerable challenges.
Speaker: Thank you very much, Paul and Rahul, for joining me today.
Speaker: It's been terrific to get your insights onto our survey data.
Speaker: And thank you all for listening.
Speaker: We all at HSBC very much look forward to supporting your organization's journey with our expertise.
Speaker: Thank you for tuning into this episode of Rethinking Treasury.
Speaker: If you're interested in learning more about the 2021 Corporate Treasury Risk Management Survey, click the link in the podcast description or talk to your HSBC representative.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast, or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
