Corporate Banking - Day 4 PDF

Corporate Banking Day 4 © 2024 CHC Financial Training Limited Agenda What? Payments and collections Trade finance services Foreign exchange Wealth management...

Corporate Banking Day 4 © 2024 CHC Financial Training Limited Agenda What? Payments and collections Trade finance services Foreign exchange Wealth management Why?… How?… 2 © 2024 CHC Financial Training Limited Payments and Collections © 2024 CHC Financial Training Limited Correspondent banks A correspondent bank or gateway banks Why do traditional banks want to offer provides services on behalf of another bank corresponding banking services? Correspondent banks are used to conduct Annuity business business in foreign countries, and act as a High returns domestic bank's agent abroad Low capital use Correspondent banks typically deduct a service Scalable fee when they pass on international transfers Revenue mix is good through the SWIFT system Enhances relationship with banks who do not have clearing capabilities Cross sell opportunities Loyalty business Source: The Bank of England “Our account with you” “Your account with us” 4 © 2024 CHC Financial Training Limited SWIFT SWIFT - Society for Worldwide Interbank Financial International bank transfers will arrive within Telecommunications one to five working days The funds will normally be deducted from the A global correspondent banking messaging sender’s account immediately network using unique standardized system of SWIFT participants have just three years to codes to securely transmit information and complete their projects before support for the instructions MT format across MT1XX, MT2XX and MT9XX Messages may go via intermediaries, also known is switched off in November 2025 without as correspondent banks extension A SWIFT code, known as a Bank Identifier Code (BIC), is a set of characters to identifies a specific country, bank, branch and account SWIFT is used by more than 11,000 banking organizations, corporations and others 5 © 2024 CHC Financial Training Limited ‘Old school’ system 4. Example: a customer 1. Historically, banks were wishes to send £2,000 to possibly only option to send an overseas USD funds cross-border. Today this account. The table maybe the slowest most illustrates the range of expensive option proceeds credited to that account 2. Banks sent cross-border payments via SWIFT and a 3. Banks set FX rates for currency correspondent banking conversion, a markup to the mid- network, increasing costs for market FX rate, hidden charge for the customer the customer 6 © 2024 CHC Financial Training Limited Real-time gross settlement (RTGS) In most countries the central bank act as settlement agent providing a platform for risk-free payment settlement Real-Time Gross Settlement (RTGS): real-time posting of debit and credit entries to participant’s settlement account with finality and irrevocability The central bank authorizes an institution to operate a settlement account ‘Gross’: payments settles singly and bilaterally No physical exchange, bank balances simply changes electronically with each transaction Other payment systems End of day net settlement systems (NSS) Intra-day net settlement (Hybrid) systems 7 © 2024 CHC Financial Training Limited Customers require Clarity Full visibility on costs, fees and FX rates Trust on amount to be received and when Delivery options No beneficiary and landing fees On delivery of the finds; ability to pay to a credit card, debit card, bank account, digital wallet or as cash Uncomplicated Enhanced customer journey Customers compare experiences not banks Advanced self-service interactions Access Access 24/7, 365 days a year Connectivity using a channel Real time preferred by the individual customer Funds delivery Omnichannel banking Status information at any point of the funds transfer Reconciliation of data Safeguards Decision making Reliable and stable platform Fully secure approval and authenticated process Compliance checked 8 © 2024 CHC Financial Training Limited Payments are important Higher working capital requirements if DPO process is not at optimal level Reduction in working capital needs – less Sub-optimal use of cash in the business due borrowing, more investment to inefficient payables processing Impact to the supply chain and relationship Non-core activities outsourced – lower costs, with suppliers resources freed up Yesterday Increased accuracy of cash forecasting Reconcile Issue Receive Match PO to Process accounts Improved supplier relationships through purchase goods and invoice payment and Spend order invoice Analytics timely and accurate payment process Corporate Bank Corporate Improved ratios and credit rating Today Issue Receive Reconcile Higher share price? Match PO to Process accounts purchase goods and order invoice invoice payment and Spend Analytics Better risk management, control over receivables and efficiency in collections Corporate Bank 9 © 2024 CHC Financial Training Limited Fast payments Countries are investing in their banking infrastructure to help money move much faster These upgraded systems are known as real-time payments, instant payments, or faster payments These payments are credit transfers completed within seconds or minutes They have low costs, reduce payment risk, and have significantly replaced the use of cash, cards, or cheques and direct debits Source: ACI Worldwide 10 Source: The CHC © 2024 BankFinancial of International Settlements Training Limited Payment criteria Security and control Authorisation process Efficient, low-cost method of transferring funds and ability to handle recurring payments Systems to handle payments to geographically diverse countries, branches or regional centres Supporting documentation required with payments Reduce administrative expense of reconciliations 11 © 2024 CHC Financial Training Limited Collections are important Higher working capital requirements because Reduction in working capital needs – less of higher DSO borrowing, more investment Sub-optimal use of cash in the business due to Increased accuracy of cash forecasting Increased sales – credit lines released inefficient receivable processing faster, goods despatch earlier, improved Delayed and inaccurate AR data collection reputation with clients causing internal planning issues Better control over client credit Improved ratios and credit rating Yesterday Higher share price? Order Dispute Account Ageing & Business Better risk management, control over Management & Analytics & Billing Management Receivable Collections Reporting receivables and efficiency in collections Corporate Today Order Dispute Business Account Ageing & Management & Management Analytics & Receivable Collections Billing Reporting Bank Corporate Bank 12 © 2024 CHC Financial Training Limited Automated clearing house (ACH) Automated Clearing House (ACH) Benefits of ACH ACH is an efficient and cost-effective method for a Reduced funds movement costs corporate to make recurring payments More predictable cash flow Integrated disbursements Control of available funds until they are needed to Electronic return reporting cover payments Fast confirmation The corporate transmits an electronic file Settlement on a specified value date Full containing the disbursement information to the value of item received by beneficiary Reduced need to maintain multiple bank bank. The bank process file (individual payments) relationships globally automatically and debits the corporate account with a single entry 13 © 2024 CHC Financial Training Limited Direct debit system Billing organisation can collect payments from Advantages its customers (subscribers) via direct debits Easy reconciliation as billing organisation (through ACH) predefines payment details for each subscriber Subscriber signs a direct debit authorisation Fast access and predictable timing (DDA) form to allow the billing organisation to Electronic collection minimises manual debit from its subscriber’s account on a pre- processing determined date Reduces manual reconciliation of cheques The billing organisation initiates the collection One-time setup for subsequent collections by sending an electronic collection file Reduced delinquencies, the elimination of bill containing the subscriber’s account information preparation, late billing procedures and reduced and the amount to be deducted to the bank postage expenses Referred to a ‘pull payments’ 14 © 2024 CHC Financial Training Limited Alternative systems Modernised customer experience What are Payment Rails? Today there are alternative systems that A payment rail is a platform or network infrastructure that operate differently to a traditional bank allows all digital money transfers to be made between These alternative systems have built a network payers and payees, regardless of country, currency, digital of local bank accounts or intermediary banks payment method, or whether the payer or payee is a who are likely to offer single currency services business or consumer This can cut out the correspondent banking Source: Tipalti costs, and speed the process, so customer The value of cross-border payments is estimated payments can be received more efficiently to increase from almost USD150 trillion in 2017 to over USD250 trillion by 2027 Factors that have been intensifying over recent years include: manufacturers expanding their supply chains across borders cross-border asset management and global investment flows international trade and e-commerce migrants sending money via international Source: The Bank of England remittances 15 © 2024 CHC Financial Training Limited FinTechs FinTech's offers local and international payments, FinTech allow users to arrange transfers fully online or multi-currency accounts and debit cards, to via mobile apps personal and corporate customers Funds are converted often using the mid-market FinTech's aim to make it easier, faster and cheaper exchange rate with a small, transparent fee to manage money across currencies, and work to The UK and Europe with their Electronic Money offer low, transparent service costs and quick Institution (EMI) licensing has been sufficient to delivery times for payments enable FinTech's to hold money on their client's behalf, FinTech's often process payments through their but it does not allow for lending of money or interest- own payment network (local accounts), rather than bearing savings accounts the SWIFT network used by banks FinTech apps eliminate all the middlemen used in legacy transfer models 16 © 2024 CHC Financial Training Limited Trade Finance Services © 2024 CHC Financial Training Limited Fundamental questions Fundamental questions in any transaction, more important with trade finance 1) When will the exporter be paid? 2) When will the importer actual pay? Order the Goods are Goods are Order the Goods are Goods are goods shipped delivered goods shipped delivered When does the exporter want When does the importer want to be paid for the goods? to pay for the goods? 18 © 2024 CHC Financial Training Limited 6 S of trade finance 1 Short-term: up to 180 days, therefore, avoid long-term Short-term trade cycles Secured: the bank may have some control over the goods (title to the goods), which provides a level of 2 security Self-liquidating: proceeds from the sale of the goods Secured (payment by importer) is the primary source of repayment to the bank Small size: average size is $75,000, although trade 3 can be much larger Self-liquidating Selective: the bank will examine each transaction Trade finance individually for compliance to the trade facility Specific: the customer’s facility can only be used for Small size trade transactions 4 Selective Specific 6 5 19 © 2024 CHC Financial Training Limited ICC International Chamber of Commerce Founded 1919. Located in Paris Mission to harmonize trade practices Members are companies and business associations from over 130 countries Core services: – Advocate international business – Promoting growth and prosperity – Setting rules and standards – Promoting the multilateral trade system – Spreading business expertise – Issue guidelines – UCP 600, URC 522, ISBP 20 © 2024 CHC Financial Training Limited Trade documentation Sales contract Bill of exchange Promissory note Banker’s acceptance Bill of lading Air waybill Packing list Certificate of origin Analysis certificate Certificate of health Blacklist certificate 21 © 2024 CHC Financial Training Limited Incoterms® 2020 (1) Incoterms® – International Commercial Terms - ICC Publication 723 Incoterms® are internationally accepted definitions and rules of interpretation Help to avoid misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods The ICC have introduced a new revision of Incoterms®, Incoterms® 2020, (1st January 2020) Each Incoterm® is a three-letter abbreviation, detailing who is responsible for each part of an international transaction Source: International Chamber of Commerce 22 © 2024 CHC Financial Training Limited Incoterms® 2020 (2) Source: International Chamber of Commerce 23 © 2024 CHC Financial Training Limited The risk ladder Trade finance is about the movement of 3 things, goods, documents and money Exporter Open Documentary Letter Cash-in advance account collections of credit Least Most Exporter secure secure Most Least Importer secure secure Open Documentary Letter Cash-in advance account collections of credit Importer 24 © 2024 CHC Financial Training Limited Foreign Exchange © 2024 CHC Financial Training Limited Spot FX Spot is quoted as currency pairs: primary currency vs FX market average daily turnover secondary currency 1 unit of the primary currency will buy ‘x’ amount of the Global FX turnover (USDbns) secondary currency GBP/USD at 1.3029 — £1 = $1.3029 2004 1,934 EUR is the primary against all other currencies 2007 3,324 EUR/GBP, EUR/USD GBP, AUD, NZD are primary except against EUR GBP/USD, 2010 3,973 AUD/USD, USD is the primary against all remaining currencies — 2013 5,357 USD/JPY, USD/MYR 2016 5,067 FX rates quoted to 4 decimal places, exception (USD/JPY) 2019 6,581 EUR/USD = 1.3926, USD/JPY = 96.09 2022 7,506 Source: BIS Triennial Central Bank Survey 2022 26 © 2024 CHC Financial Training Limited FX quotes ‘Big figure’ 1.23 ‘Pips’ 17 Primary currency Secondary currency GBP/USD 1.2317 – 1.2319 (1 unit of primary currency = 1.2317 or 1.2319 of secondary currency) Price quotes Bid price Offer price Market maker Buy GBP Sell GBP (the bank) Sell USD Buy USD Market taker Sell GBP Buy GBP (the customer) Buy USD Sell USD 27 © 2024 CHC Financial Training Limited Bloomberg FX quotes Source: Bloomberg 28 © 2024 CHC Financial Training Limited FX activity Quotes: Select a Rate GBP/USD 1.3016 / 1.3018 1. Bank sells USD buys EUR EUR/USD 1.1336 / 1.1338 2. Customer buys EUR sells GBP EUR/GBP 0.8736 / 0.8738 3. Bank buys SAR sells GBP GBP/SAR 4.7125 / 4.7325 4. Customer sells USD buys GBP 29 © 2024 CHC Financial Training Limited Wealth Management © 2024 CHC Financial Training Limited Both sides of the balance sheet The retail banking traditionally focused on the The main area is advisory services liability side of the individual’s balance sheet Demographics are relevant here: The average age of the population is Products with credit exposure for the bank increasing, leading to an increase in have high capital requirements pension requirements At the same time, in many regions people Income is limited to interest are having fewer children Average working age is declining Banks need retail products and services that diversify away from interest income, building their non-interest income 31 © 2024 CHC Financial Training Limited Why invest Equal or outperform inflation Investor concerns: Improve standard of living what assets should I invest in? what time frame is the investment for? Provide for future needs what makes a good investment? Provide for unforeseen emergencies how do the risks and returns compare? Prepare for retirement what level of risk is acceptable? Money should earn money....when I stop earning! 32 © 2024 CHC Financial Training Limited Cycle of wealth Ages 25-35 - Initial accumulation Early career Establishing investment behaviour Ages 35-50 - Developing accumulation Career development Contributions to build asset base Ages 50-65 - Consolidation or peak accumulation Assets earn as much as contributions Goal to consolidate position and preserve wealth Age 65+ - Retirement and succession Returns should exceed contributions Passing wealth to the next generation 33 © 2024 CHC Financial Training Limited Wealth management Wealth management is a combination of private banking and investment services to both retail and high-net-worth individuals (HNWI) HNWIs are subject to regulatory controls as they have access to a larger variety of investments than non-HNW retail investors HNWIs are entrepreneurs, family offices, heirs, private individuals and wealthy families Responsibility of a wealth manager is the direction of a client's cash and securities by a wealth manager. The wealth manager offers investment services in both traditional plus alternative investments and products that might not be available to the average investor 34 © 2024 CHC Financial Training Limited Question In your teams, discuss the types of investments normally offered to wealth management clients 35 © 2024 CHC Financial Training Limited Client onboarding 1 Information Wealth managers must have a clearly defined gathering procedure for both the opening of new client 2 accounts and the establishment of an investment protocol Information All involve a multiple step process to clearly analysis understand the client and their specific needs 3 Procedures will be in place for all client types Strategy Failure can result in significant fines for the agreement wealth manager Client Strategy onboarding 4 execution Results 5 analysis 36 © 2024 CHC Financial Training Limited Information gathering Obtain information for potential clients including Investment policy statement (IPS) personal data, investment and risk tolerance profile Defines parameters for the client’s investment process Understanding the client’s current position and future requirements: Framework the wealth manager must adhere to investment time horizon – immediate vs future Protects wealth manager and client and needs proves the wealth manager knows the client risk tolerance The IPS clearly defines: return objectives aligned to risk tolerance what the client can invest in liquidity needs how investment will be executed tax status and objectives why the investment is being made concentration restrictions elements unique to a specific client – SRI suitability Socially Responsible Investment (SRI) 37 © 2024 CHC Financial Training Limited Investment policy statement A private banker or wealth manager must The purpose of the IPS is to establish demonstrate a clear understanding of the the: customer’s current financial position and strategy for the investment process effective management framework future requirements for the customer’s assets and their The investment policy statement (IPS) is a asset allocation key document as part of the customer discovery and due diligence process In your team, discuss and present what your team believe should be contained within the IPS? 38 © 2024 CHC Financial Training Limited Suitability Client suitability: Assets in the client's portfolio must be appropriate and documented Product suitability: Clients have an expectation that the investment products are suitable for their investment objectives A comprehensive and systematic assessment of investment products must be conducted, and documentation detailing the suitability and eligibility criteria must be included The opportunities and risks of individual investment products must be documented to determine client suitability 39 © 2024 CHC Financial Training Limited Question In your teams, review the client profile on the next slide and compile a list of questions and information you would wish to obtain from the client 40 © 2024 CHC Financial Training Limited Information on a new client Meet Miss Aysha Al Hosani, who is your first client Client profile: 35-year-old accountant with a well-respected international firm Newly married to an artist with no dependents Salary of SAR 675,000 per year Owns a flat in Riyadh, valued at SAR 1,750,000 SAR 450,000 mortgage on flat Further details: Hopes to make partner with the accounting firm in 3-4 years SAR 1,250,000 to buy into partnership 41 © 2024 CHC Financial Training Limited Question Individually complete the questions on the ‘What is your view of risk’ question sheet 42 © 2024 CHC Financial Training Limited Activity 43 © 2024 CHC Financial Training Limited Active management Active management: Actively trading a portfolio to earn more than a ‘market’ return for the portfolio’s timeframe and risk profile Using publicly available data to actively manage a portfolio, to consistently beat the benchmark (not just from luck) after deduction of costs, taxes, management and other fees Active management can be based on either fundamental or quantitative analysis 44 © 2024 CHC Financial Training Limited Fundamental vs quantitative Fundamental analysis, the investment Quantitative analysis is based on approach relies on detailed corporate objective rules, namely the relationship specific research to identify those between inputs, such as corporates whose equity should be technical/statistical factors, and bought or sold expected return Investment decisions are based on a These assumptions can be simulated in a human judgement of the analysis, and computer model and then back-tested for applying that knowledge to a narrow set accuracy and replicated of investment opportunities The intellectual capital of the asset The intellectual capital, ie the manager is less important here knowledge, skill and experience, of the asset manager, is crucial 45 © 2024 CHC Financial Training Limited Challenges of active management The challenge with active management is to become proficient in consistently finding ALPHA delivering superior performance The asset manager considers three key elements when contemplating active investment: Timing of investment Reallocation of investments Stock picking 46 © 2024 CHC Financial Training Limited Timing of investments Timing of investments: having a broad mandate to be invested in the equity market, but periodically moving the portfolio out of equities and into fixed income (bonds) and cash based on broad market forecasts and the economic outlook These positions could then be reversed as market conditions become more beneficial for equities 47 © 2024 CHC Financial Training Limited Reallocation Reallocating the portfolio between different equity sectors and industries based on economic conditions This is basically a sector rotation strategy For example, moving the portfolio into more cyclical equities such as financials, technology, or travel and leisure during periods of higher economic activity and into more defensive equities such as utilities, healthcare and pharmaceuticals during periods of economic slowdown 48 © 2024 CHC Financial Training Limited Stock picking Stock picking: looking at individual issues to find undervalued equities and changing investment styles, by moving between differing types of stocks over the course of an economic cycle These types of stocks include: value stocks growth stocks large capitalization (large cap) small capitalization (small cap) 49 © 2024 CHC Financial Training Limited Value stocks Value stocks: buying an equity at a price lower in the market than its assumed ‘true’ or intrinsic value, so undervalued No outright rules for determining whether a corporate is undervalued, but looking at the fundamentals and the quality of the corporate based on quantitative (financial ratios) and qualitative (business model, industry) measures The focus is on price, not the current earnings. Value investing is entirely subjective as judging a corporate’s intrinsic value is an opinion 50 © 2024 CHC Financial Training Limited Growth stocks Growth stocks: buying an equity that is The aim is to look for corporates that growing quickly in sales and earnings are expected to have rapid earnings per share (EPS) growth The focus is on performance, sustainable earnings momentum, potential trends, expected positive earnings surprises and relative price performance Identifying stocks with above-average growth potential will permit the portfolio to profit from a price appreciation if the market, in general, recognises the potential 51 © 2024 CHC Financial Training Limited Small-cap stocks Small-cap stocks generally, corporates with a market cap between USD 300m and USD2bn are regarded as small-cap stocks Small-cap stocks could be new entrants to the marketplace, with the requisite growth potential, for instance to become the large- cap stocks of tomorrow Small-cap stocks can be in new industries or technologies Small-cap stocks may have limited track records 52 © 2024 CHC Financial Training Limited Strategic and tactical Asset allocation by splitting a portfolio Tactical allocations are temporary between strategic and tactical asset positions within different sectors or even allocation, also known as a market timing asset classes to take advantage of short- strategy or ‘core vs satellite’ term market conditions The core part of the portfolio is managed This adjusts the weighing of parts of the passively, while the satellite portfolios are portfolio based on short-term predictions managed actively of relative performance The main driver of portfolio strategic Price movements could be caused by asset allocation geared towards the perceived relative mis-valuations among investor’s long-term and/or short-terms the available asset classes - an asset goals for returns, risk and asset class is seen as either under or correlations, that match the client overvalued mandate (IPS) 53 © 2024 CHC Financial Training Limited Passive investment Passive management The challenge for the asset manager is The customer fundamentally believes that to ensure the return on the customer’s markets are efficient and that participants in portfolio replicates that of the index the markets are fully aware of the current This would seem a simple process: market conditions. Passive management replicating the performance of a followers also believe it is impossible to portfolio simply by replicating exactly the systematically ‘beat the market’ structure of the index. In reality, this is rarely the case The difference between the performance of the index and the customer’s portfolio is known as tracking error 54 © 2024 CHC Financial Training Limited Question In your teams, discuss and present what your team believes causes tracking error? 55 © 2024 CHC Financial Training Limited Samurai SAMURAI Specified in advance Measurable Reflective Investable Appropriate Unambiguous Accountable In your teams, discuss and present what your team believe each elements means? 56 © 2024 CHC Financial Training Limited  What? Today’s takeaways Why?… How?… 57 © 2024 CHC Financial Training Limited  THANK YOU [email protected] /IntuitionPublishing @intuition_com Intuition Publishing IntuitionPublishing © 2024 CHC Financial Training Limited Solution Growth stocks Investment grade corporate bonds Futures contracts Investment grade government bonds Equity or bond mutual funds Real estate, residential and commercial Savings account Cash ‘Blue chip’ high quality stocks Collectables, cars, stamps, antiques Money market mutual funds Certificate of deposit Exchange traded funds Commodities, gold, oil and food products 59 © 2024 CHC Financial Training Limited Solution – IPS content Defining the investor(s) Role of the asset manager Financial goals Initial investment amount Investment performance objectives Risk objectives Restricted asset classes Time horizon Target allocation and investment universe Performance measurement and benchmarking Investment monitoring and reporting Review and updating process for the IPS 60 © 2024 CHC Financial Training Limited Solution Client considerations: Does Miss Hossani own any investment Should Miss Al Hosani pay off her debt or vehicles and pensions? start investing? How to invest? Asset allocation Emergency fund - what is it, does Miss Al Life insurance - does she need it? Hosani have one and how much should she Disability insurance - what are the benefits have in it? – At least three times her monthly of an individual policy? expenses Will Miss Al Hosani be moving now that she is marriage? Will she and her husband be looking to buy a larger home? How much should Miss Al Hosnai aim to save each year, particularly if she wants to buy into the partnership? Will her employer fund the purchase of the partnership? 61 © 2024 CHC Financial Training Limited Solution 62 © 2024 CHC Financial Training Limited Solution - tracking error (I) The customer portfolio may not replicate the The asset manager charges fees for both composition of the benchmark managing and administering the portfolio The greater the deviation of the customer Administrative fees include charges for portfolio from the benchmark, the higher safe custody and legal fees the potential tracking error Even if relatively low, fees need to be An inefficient indexed portfolio may deducted from the return on the portfolio, generate a positive tracking error in a reducing the return relative to the falling market by holding too much cash benchmark Performance of a portfolio can be presented either as a gross return (fees not charged) or as a net return (fees charged) 63 © 2024 CHC Financial Training Limited Solution - tracking error (II) Transaction costs are incurred when making Investors may face a trade-off between changes to the customer’s portfolio the level of transaction costs and the Some indices adjust the index need to replicate the index components on a regular basis Asset manager required to adjust the customer’s portfolio by selling stocks removed from the index and purchasing those added to the index Potential for stock prices to be more volatile as other investors using the benchmark are also required to adjust their positions 64 © 2024 CHC Financial Training Limited