Corporate banking Introduction Since several decades, banks and companies have maintained business relationships.

Over time, banks have been the driving engine behind the economic development of big and small economies. The last decade has been characterized by the lots of changes in the economic environment as well as changes in the regulatory framework that surrounds the banking sector. The Financial crisis 20072009 in the US, and the sovereign crisis in Europe forced regulators to think in terms of better and more effective control on the banks. Basel 2 was rapidly replaced by Basel 3. Losses caused by exposures reduced capital of banks significantly forcing banks to look for more capital. At the same time, in a difficult economic environment, capital has started to become scarcer and banks are forced to make use of this input more efficiently. Deleveraging that affects the financing of corporate customers is common these days. Banks are turning to SMEs and Retail customers whilst large corporate customers are turning to the capital markets to raise funds. Hence the process of disintermediation is becoming more apparent. In the Mauritian capital market, CIM Co Ltd (a spin-off of Rogers Group) recently raised funds to repay its debts with banks and Ellipsis (a property development company) raised equity capital to finance its property development at Trianon. Hence corporate customers that account for the vast majority of bank lending have started to cross boundaries in search of cheaper funds. Chapter summary The present chapter builds on what students learned earlier module on corporate banking. Students will understand the role and responsibilities of corporate file managers and the way portfolios of customers are developed and nurtured inside the Corporate Banking department of a bank. In this chapter, students will understand the difference between financing the upper part and the lower part of the balance sheet. Students will be looking at the needs of corporate customers in terms of working capital solutions, capital consolidation, international trade financing and issue different types of bank guarantees. Students will learn the way bankers look at balance sheets to look for stability between capital structure and financing of activities.

The Corporate department and role/ responsibilities of a corporate file manager Banks have separated their activities between Retail Banking and Corporate Banking to facilitate the growth of their businesses and market shares. Retail Banking caters mostly for the raising of deposits whilst Corporate Department has the role of using these deposits or onward lending to corporate customers who remain the biggest users of funds. Branch networks fall under the Retail Business Unit and employ the vast majority of workers who nurture relationships with individual customers mainly. Besides, the vast majority of SMEs, Professional and companies open accounts throughout the Retail branches. These non-individual customers maintain their accounts with branches that facilitate living by collecting their daily deposits, providing chequebook facilities, night-safe facilities, among other means of payment. The Corporate department remains a specialist department whose role is to provide funding and advice to companies, which are medium- sized and large. Smaller sized companies (SMEs) that do not require specialist advice for the time-being are hatched and nurtured in another department (sometimes called the SME Department) and their accounts are transferred to the Corporate Department as and when they grow and their requirements in terms of funding and advice become more important. The Corporate structure is quite lean and the department employs a limited number of sepcialist staff. A simple organigramme of Corporate department can be laid down as follows: Head of Corporate Deputy Head of corporate Corporate file Managers Corporate Credit Analysts Corporate Service Representatives operators Administrative Clerks One of the main responsibilities of the Head of Corporate is to manage the growth of the corporate portfolio and its ensuing profitability. Corporate file managers also known as relationship managers or account executives have the responsibility of growing their portfolio of customers, lending portfolio and profitability. They have yearly targets in terms of lending, products penetration, cross-selling and profitability of their individual portfolios that add altogether to make the Corporate departments yearly targets. These file managers grow their portfolios through the Back-0ffice

development of their existing portfolios and marketing of potential customers of other banks. The corporate department works closely with the Credit Risk department which looks at requests submitted by corporate file managers from an objective point of view and this completes the four-eye principle of Basel 2. The Credit Risk monitors the daily excesses on each individual corporate customers account and they also give their recommendation on every request that is submitted to Credit Committee for approval. Understanding corporate customers requirements Non-individual customers open accounts with banks with two main objectives: facilitate the movement of sales proceeds through the different means of payments and the obtaining of credit facilities. The different means of payment include the tills at the banks to collect deposits, cheque book facilities, transfer of funds, payment of salaries, Internet banking, trade finance, bank guarantees among others. Companies have life cycles. They take birth, grow, become mature and at some point they may die, if their lives are not extended through different business strategies. Hence a company goes through four major stages during its existenceintroduction, growth, maturity and decline. The table below gives a brief description of a companys sales, cash flow and profitability behaviour during each stage. Stage Introduc tion Growth Maturity Decline Sales Slow Rapid growth Not exceeding market growth Declining sales Cash flow Negative Negative Positive Positive, then negative Profitabili ty Negative Negative, then positive Positive Positive, then negative BCG Matrix Question mark Star Cash cow Dogs

At any stage, the requirements of companies can be categorized either financing long-term capital requirements or working capital funding. In other words, the banks can be called upon to finance either the upper-part of the balance sheet (fixed assets) or the lower part (current assets). Companies are always in need of funds to move along their life cycle and they raise the required funds either from banks or through disintermediation processes, i.e., sale of shares/ raising debts directly to the public. The level of intermediation and

disintermediation depends of the level of financial development coupled with development in the legal framework in the country. In Anglo-Saxon countries, banks have much lesser importance than capital markets in providing capital and debts whilst European countries have much bank-based developments.

Financing the upper part of the balance sheet Banks play a very important role in providing the structural stability in the balance sheets of companies by financing and helping either side of balance sheets. In terms of structure, the structural stability of balance sheets is important. On the upper part assets side of the balance sheet, banks provide funds to acquire fixed assets and undertake longer term investments. The most common facility to finance such expenditures is a term loan repayable over several years based on the repayment capacity of the borrower. The role of the credit analysts in the corporate department is to assess such requests in terms of business fundamentals of the company, the repayment capacity and security analysis. Alternatively, banks provide leasing facilities mainly to finance acquisition of movable assets by providing finance or operating leases. Some banks have merged their leasing activities into their banking activities and leasing has become one of their banking facilities granted to their corporate customers. Whilst there are still some banks that have kept their leasing activities separated from their banking business. Banks such as SBM, Barclays and Bramer provide leasing facility as a banking facility whereas MCB provides leasing facility through its subsidiary, Finlease. On the liabilities side, the help of Corporate department of banks is needed mainly in advisory, financial engineering and underwriting processes and banks returns are mainly in terms of fees and commissions. In terms of advisory, banks help in the Initial Public Offering process by preparing the prospectus, collecting public money, allotment of shares and ensuring smooth listing of shares. The role of banks is very important in an IPO through their underwriting process for which banks receive a fee. Banks also play a crucial role in mergers and acquisitions, MBOs and LBOs by acting as advisor and providing the necessary finance to complete such deals which can be term loans and mezzanine finance.

Financing the lower part of the balance sheet

Trade Finance One of the major facilities provided to companies is Trade finance, which can be described as the provision of bank credit facilities to meet a company's borrowing needs in relation to their international trade activities. The traditional analysis of the balance sheet would give us a view on the companys financial status, but would generate very little information regarding their trading activity, and thus make it difficult to formulate meaningful facilities. Several Trade finance techniques can be used to bridge the funding gap between any credit provided in the terms of trade (negotiated by the exporter and importer) and the need to fund stock and debtors. Historically, within many banks this funding gap has been financed by overdraft facilities. Furthermore, it is agreed that in many instances, traditional "domestic" working capital finance continues to offer a perfectly adequate solution to customers involved in international trade. However, a major advantage of trade finance products and techniques is the additional comfort which a bank can gain through transactional control. In the trade finance environment it is possible to break trade related business into its constituent parts and thereby gain a better view of potential areas of risk. Structured loans can be used in place of overdrafts, which whilst very flexible, are also open-ended from a risk perspective. Trade finance structured loans typically have rolling limits and maturity dates set to coincide with the borrower's cash flow generated by the sale of goods.

Trade finance structures therefore offer a bank considerable advantages: Use of trade finance instruments (for example, Documentary Collections, Documentary Credits etc.) enables the bank to exercise transactional control and mitigate risks. Credit facilities are more closely matched to the customer's transactional requirements and trade cycle. Unlike conventional overdrafts, moneys borrowed cannot be easily diverted into supporting general working capital or indeed financing losses. Repayment is more closely linked to the sale of underlying goods. Any delay in repayment gives an early warning of liquidity problems.

Structured facilities increase the quality of account information for the bank which therefore improves their ability to monitor risk. In certain circumstances the bank will have a prior security interest in the goods financed enabling the bank to sell the underlying goods.

Banks can feel more comfortable to lend through trade finance techniques and this has a positive effect on their willingness to make credit facilities available to their customers involved in international trade. Thus the use of trade finance products by a bank offers a number of advantages for their customers: The Bank may be prepared to make trade finance facilities available even if the customer's normal credit facilities are fully extended or the customer's balance sheet does not support the level of limits requested. Specific facilities for individual transactions enable the customer to evaluate the profitability of individual transactions, including financial costs. For the customer with a strong credit standing and balance sheet the bank may be prepared to offer a lower margin than on a conventional overdraft in recognition of the superior transactional control and improved risk profile. Terms of Trade The method of payment is generally agreed by the exporter and the importer at the time the sales contract is negotiated Importers and exporters have naturally opposing views of risk in international trade. A payment structure which is totally satisfactory for an importer invariably involves a high element of risk for the exporter and vice versa. It is possible to consider this situation as a Risk Ladder on which the risks for the importer gradually increase as you go higher, whilst the corresponding risk for the exporter gradually decreases.

Risk Ladder High Risk Open Account Documents against Acceptance Low Risk

Documents against Payment Exporter Unconfirmed Documentary Credit Importer

Confirmed Documentary Credit

Low Risk

Cash in Advance

High Risk

The method of payment used will usually depend on: The negotiations between the exporter and importer before the sales contract is signed. An importer who is very keen to obtain goods from a particular source (perhaps due to quality or price) may have little choice other than to accept the exporter's request for a certain type of payment method. The commercial practice in the countries involved. For example, open account trading is normal practice for trade within the EU and North America. On the other hand, for trade between the EU Asian countries Documentary Credits are widely used. When negotiating the method of payment the exporter/importer should bear in mind that their decision on this matter will affect not only the risk of payment/non payment but also the alternative trade financing structures available. The principal trade financing instruments and techniques are described in detail in this Manual.

INTERNATIONAL TRADE DOCUMENTATION

There are many documents which are used for one purpose or another in foreign trade. They can be categorised under the following general headings. Transport documents (bill of lading, air waybill or combined transport bill of lading etc). A transport document is a document that indicates loading on board or dispatch or taking in charge. Its functions are to provide evidence of a contract of carriage, evidence of receipt of the goods (by the carrier) and, in some cases, they are also documents of title, giving the holder of the documents title to the possession of the goods. Commercial documents: the most important of these is the invoice. Insurance documents Official documents required by government regulations. Financial documents, e.g. the bill of exchange or the promissory note.

Bill of lading

A maritime or marine bill of lading is a transport document for goods shipped by sea. In spite of the considerable growth of container transport, the marine bill of lading is still the most common transport document for exporting to Africa, Asia and the Middle East (particularly when payment by the overseas buyer for the goods is arranged through the banking system). A bill of lading has three separate functions. (a) It is evidence of a contract of carriage between the shipping company and either the exporter or the foreign buyer, to transport the goods by sea (as detailed in the bill of lading). It is a receipt for the goods taken on board ship, and provides some details about the condition of goods received. (i) A clean bill of lading is one which does not have any statement by the shipping company that there is some defect in the goods or their packaging.

(b)

(ii)

A foul or dirty bill of lading is one which may carry a statement that the goods received or their packaging is damaged (in a specified way).

(iii)

A received for shipment bill of lading merely confirms that the shipping company has the goods in its custody for shipment. This type of bill of lading is commonly used for goods packed into containers at the exporters factory or at an inland depot and then driven on board ship.

The shipping company endorses the received for shipment bill of lading to confirm that it has taken custody of the containers. You might also come across the term container bill of lading (c) A bill of lading, once signed by the exporter, is also a document of title, which means that the holder of the bill of lading has the right to possess the goods.

Indeed the goods will only be released by the shipping company at the port of destination to someone (the buyers representative) who presents a signed original of the bill of landing.

The document of title aspect of a bill of lading is also very important for the payment arrangements, i.e. the procedures whereby the buyer pays the exporter for the goods. A bill of lading is usually made out in sets of two, three or even more originals, all signed and any one of them giving them the holder title to the goods.

When a bank handles a bill of lading, it must therefore be sure to check that is has a full set of the signed originals, because only a full set ensures complete control over the right to gain possession of the goods.

A bill of lading is prepared by the exporter (or a freight forwarding agent) and then given to the shipping company for completion. The shipping company acknowledges receipt, and adds any statement about damaged goods or packaging where necessary. If the goods are undamaged the shipping company will issue a clean bill of lading. The shipping companys terms and conditions of carriage, however, are printed on the back of the bill of lading.

A firm of freight forwarders might use its own house bill of lading.

When the shipping company returns these signed originals, they can now perform their three functions of (1) evidence of contract, (2) receipt for the goods and (3) document of title.

Title to the goods can be transferred by the sender, using a (marine) bill of lading, in one of three ways:

Issuing a bill of lading to order and endorsing them in blank. The title to the goods can be obtained by anyone presenting a signed original copy of the bill of lading.

Issuing the bill of lading to the order of the named buyer or bank abroad

Issuing the bill of lading to the order of the named buyer, but arranging for the bill of lading to be presented to the buyer through the international banking system.

Since the bill of lading will be despatched to the buyer, perhaps through the banking system, usually long before the goods arrive at their destination, evidence that the goods are in fact on the way might be provided by the wording shipped or since shipped on the bill.

A bill of lading must show clearly that the conditions of shipment between buyer and seller have been met, with regard to arrangements for dividing responsibilities for carriage and insurance. For example, if the terms are:

(a)

FAS Liverpool the bill of lading would indicate that goods had been received at Liverpool for putting on board ship;

(b)

FOB Bristol the bill of lading would indicate that the goods had been loaded on board ship, and the port of loading on the bill would be Bristol;

(c)

CFR Adelaide would show that the goods had been loaded on board ship, with a destination of Adelaide. A statement freight paid would also be included for the benefit of the overseas consignee;

(d)

CIF Calcutta would show that the goods had been loaded on board ship, with a destination of Calcutta. A statement freight paid would be included. The shipper is not concerned with insurance for the goods, and evidence of insurance would not be included on the bill of lading, as it would be provided by the certificate of insurance, or the insurance policy.

Answers to self-test questions: Question 1 a.The BCG matrix or the Boston Consulting Group analysis is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations in analyzing their business units or business lines. b. Cash cows are units with high market share in a slow-growing industry which typically

generates cash in excess of the amount of cash needed to maintain the business. Found in a "mature" market, they are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. Dogs are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs should be divested. Question marks are also known as problem children. They are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash, hence always having negative cash balances. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Stars have a high market share in a fast-growing industry. The objective of is to become cash cows.