When Bill Sullivan decided to improve his banking relationships, he engaged in addition by subtraction. The finance chief of ProLogis, a Denver-based real estate investment trust, had an army of banks — 41, to be exact — participating in the company's $3.6 billion line of credit. As banks are wont to do, many clamored for a helping of the firm's debt and equity underwriting deals. Sullivan couldn't satisfy them all, so in the summer of 2009 he cut the number of banks to 19, while shrinking the revolver. Each credit provider now gets a bigger slice of ProLogis's banking spend. More important, Sullivan gets something in return: "Once I whittled it down, I ended up with a core group of banks that are tremendously responsive."
Most CFOs want their banks to be responsive, but few are feeling the love as banks slowly emerge from two years of their own hell. In a new CFO survey, almost 25% (of 640-plus respondents) describe their relationship with their primary bank as "strictly transactional" — that is, their bank is interested in them only as a source of revenue. Another 20% classify it as "deteriorating" or "abysmal."
A substantial number plan to respond accordingly. Between now and the middle of next year, more companies — 19% of midsize businesses and 16% of small businesses, according to Greenwich Associates — will issue requests for proposals, a key step in switching to new banks. (Historically, only about 10% of firms switch banks in any given year.) As motivation, CFOs are most commonly citing dissatisfaction with customer service and a desire to reduce banking fees.
Other CFOs, however, don't want to upset the apple cart. After all, while commercial and industrial lending has fallen for six straight quarters, companies still rely heavily on banks for funding. Any move that weakens connections with credit providers, especially those that command large market shares, is dangerous in this economy. What's more, switching banks means moving "sticky" services like cash management, an expensive proposition.
So what's the alternative? Go the other way, according to many experts. Cement ties to your banks, work to stand out among the herd of clients, and figure out why your company should matter to them. And in a pinch, don't hesitate to play banks off one another. Those actions may give your company a leg up when it comes time to refinance.
By following some of the guidelines detailed below, a CFO stands a good chance of regaining the upper hand. At the very least the company will have a much better handle on whether it is currently doing business with the right financial partner.
Piece Offerings
The first step in bolstering a company's credibility with its bank(s), according to Craig Orchant and Reuben Daniels of EA Markets, a capital-markets and banking-advisory firm, is to perform a very basic analysis that quantifies the company's total banking spend and its different components. CFOs need to understand three costs in particular: hard fees (investment-banking fees that are disclosed and easy to calculate), "soft" fees (undisclosed, such as the spread a bank earns on an interest-rate swap), and "shadow" fees (noneconomic fees that enhance a franchise in a particular business line or league table).
Using account-analysis statements, a company can examine almost the entire mix of service-based activities it employs, says Mike Gallanis, a partner at Treasury Strategies, including such things as checks issued for disbursements, customer payments into depository accounts, wire transfers, and the information-reporting services provided by the bank. ProLogis's Sullivan closely tracks which banks get his capital-markets business and how they benefit from a profit and league-table standpoint.
Adding up those expenditures will enlighten CFOs as to how much business they actually bring each bank provider. Such information is power, because banks and corporations tend to hew to an unwritten rule that a borrower will also tap its lenders for other, more lucrative products.
"The day-to-day transactional business is the foundation of a [company-bank] relationship," says Greg Becker, president of Silicon Valley Bank and SVB Financial Group. "If you have a client's core banking, you will keep that client longer" and the lifetime value of the client will be higher. SVB doesn't "deliver" credit unless the ties extend past the credit facility alone, Becker says. "We want it to be part of a piece."
Diane Quinn, managing director of large corporate banking at JPMorgan Chase, says treasury teams are scrutinizing banking business awarded to noncredit providers. For example, corporate marketing departments that issue customer rebates often pick a third-party payment provider without consulting their finance departments, and the same often happens when procurement departments choose credit-card issuers. But as capital has become scarcer, finance departments are insisting that these "back-end" financial providers be among the company's lenders, says Quinn.
That kind of rigor can bolster banking relationships but may also present a dilemma: CFOs want their cash management, treasury, and other services to be cost-effective and efficient, but if a firm has multiple lending banks and tries to share the wealth, efficiency can suffer. "One could argue that the more banks you involve the less efficient the process will be," says Gallanis. On top of that is concern about counterparty risk exposure. If a company has all its cash management with one or two banks because they are its only lenders, but those banks don't have stellar economic profiles, the board of directors may pressure the CFO to diversify, says Gallanis.
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