Take Control of Your Bankers

Tired of being at the mercy of their banks, CFOs are working hard to regain the upper hand.

Quinn of JPMorgan Chase says lending banks merely want an opportunity to compete for other business via an RFP. “It’s then the bank’s responsibility to provide a competitive solution,” she says.

Walk a Mile

A more sophisticated approach to gaining leverage is to step into a bank’s shoes by calculating how much value (versus business) the company brings it. From a qualitative standpoint, every bank has different business plans and different strengths and weaknesses, explains Orchant of EA Markets. “While they all want as many dollars as possible, some dollars are worth more than others. Each bank applies a different lens to the spend.” Or, as Daniels says, “If you’re spending money with a bank that doesn’t really care about that particular revenue set, then you’re wasting those fees.”

A Japanese bank, for example, that wants to grow its derivatives business in the United States might be content to take the fee associated with its participation in an underwriting deal, but it would much rather handle an interest-rate swap.

Quantifying the profitability of a bank relationship is also important. For that, a business can model its banks’ RAROC (risk adjusted return on capital). RAROC is used to evaluate the profitability of a transaction or a relationship given a company’s risk profile and a bank’s resulting return on capital. As the financial crisis deepened last year, more banks embraced some form of this metric. “There has been a lot of soul-searching by banks to identify and focus on the companies within particular industries that they can make money on,” says CFO Sullivan.

To calculate RAROC, a CFO has to know each piece of business awarded to the bank, all fees associated with services, and the minimum capital-allocation requirements for credit-related products. Commercial bankers will have a certain minimum RAROC result that they have to hit — one they are often not likely to divulge to customers, says Ron Box, finance chief of Birmingham, Alabama-based Joe Money Machinery. “If I could find out the exact equation with all the exact weightings so that I could calculate it myself, I certainly would,” says Box. Failing that, finance departments can at least discover the model’s inputs so they can apportion business accordingly.

For example, while a company’s credit risk is not something it can directly affect — except through performance — areas like deposits and fee-based services can be reallocated or adjusted. As a heavy-construction-equipment company, Joe Money Machinery has a high average balance in its low-interest-bearing operating account (an account through which funds pass quickly as clients pay for equipment that JMM then buys) because it sells high-priced products. That’s a positive for its bank’s RAROC even if the bank is flush with cash. “The more it costs the bank to maintain the deposit relationship the less [the relationship] is going to add to its capital structure,” says Box. On the other hand, a high-rate certificate of deposit would hurt the bank’s RAROC.


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