Inside Your Banker’s Head

Companies are starting to figure out how their banks make money. Banks actually like that.

Smarter Partners

Of course, there will always be limits on how far companies will go to maximize their banks’ return. Several finance executives told CFO they wouldn’t have their banks administer their 401(k) because their fiduciary responsibility required them to assess that business with the interests of employees rather than shareholders uppermost in their minds. Others simply don’t believe their banks can handle all the services they now offer. “Our commercial bankers tried to sell us M&A,” remarks one CFO of a transportation company with more than $1 billion in revenues, who asked not to be named. “There’s no way I would ever use them for M&A. Ever. I’m going to go with a big investment house.”

Nonetheless, the relationship between banks and their corporate customers does seem to be changing, and the better understanding of return models may be simply a first step. “RAROC serves as a foundation for a broader economic partnership between the bank and its client,” observes Mercer Oliver Wyman’s Charles Bralver, head of the firm’s strategic finance practice. Going forward, Mercer’s Studer predicts corporations will treat their banks more like industrial suppliers. “You haven’t really seen the shared design and just-in-time relationships that you see in manufacturing,” he says. “It’s only really now that we start to see that kind of relationship.” Indeed, while 22 percent of CFO survey respondents said they manage their banks no differently than any other commodity vendor, almost half — 49 percent — said they view their banks as business partners and involve them closely in business decisions.

“Our corporate clients have a good understanding and appreciation for risk-return models, and it’s hard for me to imagine that it will not continue to evolve,” agrees Citigroup’s Calfo.

To be sure, that’s happening slowly now. Despite a flattening yield curve that may yet rein in bank lending, it’s hard for companies to devote resources to a more rigorous analysis of their banking relationships when credit is still cheap and easy to come by. But Skerritt notes that many companies have used today’s rates to lock up five-year backup credit facilities. “If you don’t have to renegotiate in 364 days or three years, perhaps you can use the resources now [to build a return model]. Then when the credit cycle changes, you have this model in place and are prepared.” Since being short-staffed is one of the most common complaints of treasury departments, she notes, “managing resources to anticipate a change in the credit cycle makes a lot of sense.”

That way, when the credit cycle turns, CFOs and treasurers can be confident that the members of their bank group really want to be a part of it.

Tim Reason is a senior editor at CFO. Randal Rombeiro, a former Fortune 1,000 corporate treasurer, contributed to this article.

A Simple Return

Corporate borrowers can be easily frustrated in their efforts to understand the proprietary — and often volatile — RAROC models for each bank in their group. But for most companies, it is enough to create a simpler common return on regulatory capital (CRORC) model that standardizes many of the assumptions. Such a model can be used to quantify the non-risk-adjusted return on regulatory capital for each bank (and can be easily maintained on a spreadsheet). The result can help borrowers identify any imbalances in the distribution of credit and fee-based business within their bank group. Moreover, the model allows borrowers to analyze the impact of awarding (or moving) transactions and services — a helpful tool when credit gets tight. Building it involves some simple steps:


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