IGTA Journal - Winter 2020/2021

Last year reminded us that forecasting can make fools of us all, but that doesn’t stop it being a necessity for businesses. This year will be another di cult year for forecasters to get right, but there are definite trends and risks that are apparent now and will have an impact on liquidity and credit, the issues closest to the heart of any treasurer. Two big forces dominated the economic story for corporates in 2020. The first was obviously the impact on revenues of the social restrictions and changes in customer behaviour due to the pandemic. The second was the combined and often coordinated e ect of government and central bank financial intervention. Last year’s interventions were a form of economic triage, designed to prioritise funding to corporates that would survive the crisis, but only with financial support. Banks were placed at the forefront of implementing that support. Given the speed and scale with which it had to be introduced, that process was always going to be di cult and not uniformly fair. Some corporate treasurers will have undoubtedly felt the adverse side of this process. It is not di cult to predict that the same two forces, the pandemic and ongoing intervention by central banks, will continue to dominate in 2021 – but the narrative will change. Many corporate treasurers are worried about financing. Surplus liquidity and capital are a combination that compels banks to lend, as both weigh down their profitability. The only thing that will cause them to pause is collapsing asset prices (who wants to make a loan at a 70% loan-to-value (LTV) ratio, only to find that it is at 90% LTV 12 months later?) or collapsing corporate revenues. In those circumstances, 2020 shows that it pays to have an established relationship with a bank, which is in a position to understand the potential for recovery and will prioritise existing customer relationships. But, with asset prices stable and revenues recovering, corporate treasurers may find banks competing to fund them in 2021, rather than being reluctant. With financial conditions so shaped by the action of central banks, treasurers should be aware of any factors that might impact pricing or availability. Central bank support already tends to favour some asset classes and penalise others, such as residential property There are strong reasons to be optimistic about credit conditions in 2021. The first is liquidity. At the start of the global financial crisis (GFC) in 2007/8, central banks were caught back-footed with neither the will nor the tools to support the financial system with liquidity. As a result, commercial banks all over the world were unable to lend because they were simply running out of cash. Fast-forward to 2020 and central banks were at the front of the response to the pandemic problems. The tools they had developed during and after the financial crisis were deployed and liquidity supplied to the financial system in colossal, and in some cases unlimited, proportions. Financial markets and commercial banks are awash with liquidity. Treasurers worrying about whether market liquidity will dry up are like old generals fighting the battles of the last war. The financial system is not in danger of running dry of liquidity – the danger is drowning in it. The second reason is bank capital. Again, the lessons of the GFC have left banks with much stronger capital levels. They can absorb credit losses much more severe than those that occurred in 2020 without denting their capacity to lend. Bank regulators have developed more sophisticated capital tools, such as counter-cyclical bu ers, in order to manage capital in the banking system. lending versus commercial property lending. In 2021, the Bank of England will spur LIBOR transition by penalising portfolios with any LIBOR exposure that are used to access its funding facilities. Corporate treasurers who have avoided tackling LIBOR transition to date may find their public debt discounted unless they take action. If negative interest rates are introduced, they could cause ruptures in an already overinflated and distorted financial system, which treasurers should be alert to. Overall, the outlook for funding conditions in 2021 is relatively benign, but treasurers by their nature are always watching the dark clouds. Paul Wilde is treasurer at Shawbrook Bank and a former president of the Association of Corporate Treasurers COMMENT treasurers.org/thetreasurer Issue 1 2021 09 PAUL WILDE EXPLAINS WHY TREASURERS CAN BE OPTIMISTIC ABOUT CREDIT CONDITIONS AND BANK SUPPORT IN 2021 OUTLOOK: FAIR TO GOOD IGTA eJournal | Winter 2020/21 | 53