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Why private credit and ESG investments are imperative to treasurers
In this NextWave Banking in Asia-Pacific podcast episode, speakers discuss the EY Voice of the Treasurer Survey, exploring strategic evolution of treasury departments and highlighting the critical role of digitization.
In this episode, host Andrew Gilder and Shin Yamazaki - Managing Director and Head of Transaction Banking Asia-Pacific at SMBC delve into the EY Voice of the Treasurer Survey, revealing insights from CFOs and treasurers across seven markets. Tune in for an in-depth discussion on private credit, sector-specific solutions, artificial intelligence (AI) integration, and ESG-focused investments.
In this compelling discussion, the speakers tackle:
How AI integration is transforming treasury functions
How private credit is changing the banking landscape
Why customization in banking solutions is essential
Why ESG investments are crucial for treasurers
For your convenience, full text transcript of this podcast is also available.
Andrew Gilder
Welcome to the EY Next Wave Banking in Asia-Pacific Podcast. I’m Andrew Gilder, your host.
In today’s podcast, we’re exploring the EY Voice of the Treasurer Survey, which gave a lens into the future of treasury management. The purpose of the survey was to explore the role of treasury departments, which is evolving from traditional functions to strategic roles, with a particular focus on tactical working capital management, proactive risk management mitigation, technology-driven efficiency, and supporting the growth of the enterprise.
The survey covered CFOs and treasurers of large corporations and commercial entities with turnover above 250 million US dollars. We surveyed CFOs and treasurers across seven markets in over 1800 organizations with 21 in-depth interviews and over 1800 online survey respondents covering 14 industry groups.
Today I’m joined by Yamazaki-san, Managing Director and Head of Transaction Banking Asia-Pacific at SMBC. Welcome, Yamazaki-san. Perhaps you could provide the listeners with a bit of your background and the role you play at SMBC.
Shin Yamazaki
Hi, Andrew. Thank you very much for having me. My name is Shin Yamazaki. I’m the Head of Transaction Banking Asia-Pacific in SMBC. SMBC is one of the largest Japanese banks operating in 39 countries outside of Japan, and 15 of those are in this region. We have a strong interest and strong mandate commitment in this part of the world. I head the transaction banking area, where we offer varieties of liquidity management and payment solutions to a wide variety of our clients.
Gilder
Yamazaki-san, thanks for joining us today. I really appreciate you coming in and spending some time with us to talk about our recent survey results on the Voice of the Treasurer. Maybe if we kick off with a question on digitization. So, one of the themes that came out from the survey was that 73% of the survey respondents feel that digitization of the treasury function remains a challenge. So, maybe if you can give us your thoughts on what services do you see banks providing to their corporate clients to help them with their need to automate and digitize their corporate treasury functions, and maybe a little bit on how far progressed is the market on this topic at the moment.
Yamazaki
On that question, perhaps the immediate answer what the banks are doing, maybe I’ll start from there. So, in terms of promoting the digitization –support the corporates for this digitalization journey– of course, the banks have a series of products which enable or support, bolster that digitization. For example, the channel. So, in recent years, many banks have equipped themselves with the APIs. So, in order to push the data, pull the data in that window, API functions very efficiently, especially in this real-time, fast-moving kind of a world.
However, if I kind of take a one step back, the digitization, how do we kind of frame this digitization? Is it just talking about their own corporate process or treasurer’s process, or even the bank’s kind of payment process? I guess the digitalization can be kind of defined a little bit broader as it should be. For example, a lot of marketplaces have been evolved, and the corporates are more keen to have a direct access to the consumers. So, that is going to change how banks are going to react to the corporate’s requirement or the market or the client’s requirement.
Gilder
And how do you see the banks dealing with the concern that some of the treasurers have that they become too dependent upon the banks? So, if the bank starts to help them with this digitization challenge, there’s some level of fear that they become too beholden to the bank. How do you deal with that challenge?
Yamazaki
Yeah, I think that is a valid concern. Of course, maybe I shouldn’t be saying this, but banks are keen to keep banking with that specific bank. So there is a vested interest and, of course, the transition cost. If the corporate wants to kind of move from Bank A to Bank B, there’s always this transition cost, and that cost right now is pretty high. And the more you deal with specific bank, any bank, that transition cost will be considerably higher. Now the point here is while the digitization is going to progress and I think the technology is going to advance, hopefully, that transition cost will be much more reasonable, even more so for those smaller companies or SME make companies as well.
Gilder
Yeah. That’s actually a good segue onto the second topic we wanted to cover, which was on private credit, which seems to be emerging as a competition for the banks with almost three-quarters of respondents open to tapping them for their financing needs. So, private credit and private equity, actually. And so, how do banks stay at the forefront of the client relationship as private credit markets evolve and start to provide financing direct to who are traditionally your corporate clients? And then how do you see banks perhaps partnering with private credit in the coming years? Because there’s two sides of the equation. There’s -- they are competition, but they can also be a partner in servicing some of your corporate clients.
Yamazaki
You are absolutely right by saying that private credit is gaining the momentum, getting more present in the lending space from the bank’s viewpoint. However, these so-called “funding routes” or “options” is always multiples. It’s not only the bank’s lending depending on the situation, though, but corporates have access to a capital market as well. Corporate has access to various other funding source, including those, for example, working capital factoring kind of services as well. So, it’s really depending on how the private credit kicks in with what kind of credit appetite and what kind of price because, at the end of the day, it will be the combination that will do the best for the economy and also for the specific companies as well. So, us, yes, we do see a little bit of a competition kind of flavor of it, but you know, we do also work together with them quite closely.
Gilder
And so is what part of the way you think about it that the private credit allow you to use your balance sheet elsewhere with that corporate? So, you know, if private credit steps in to take some of the lending, you can do other higher value-added activities with that corporate client, use your balance sheet, other ways to support them?
Yamazaki
Absolutely. That is the case. I think the bank’s so-called ‘credit appetite’ do not need to be all concentrated in the form of lending. Obviously, it can be in the other form of the credit as well. Just to give you an example, we see a lot of shifts in supply chain in last three years, so maybe last five years starting with the COVID-19 and geopolitical tensions here and there. So, we see that supply chain has been kind of evolving and shifting. So, the corporate needs to kind of deal with different regions, different counterparties. When they do so, obviously, they will find a bank service quite handy when they try to expand and make the supply chain resilient.
Gilder
Yep. All right. If we move on to the next area, which is customizing solutions for sector. So, one of the themes that came through the survey results is that 71% of clients want solutions from their bank that are really customized for their sector or for their industry. However, at the moment they feel that they end up getting relatively generic tools and solutions from their banks. We see in the marketplace that banks do talk a lot about their customer-specific solutions, but that’s not really resonating with clients at the moment. So, where do you think that gap might be between what banks think they’re offering in terms of sector-specific solutions and what clients of the banks are actually wanting?
Yamazaki
I think the banks are really keen to find the right product suite for the specific sectors and perhaps for the specific customers as well. However, the results don’t say it’s otherwise. I would like to think that there are some tools or products that can be specifically useful in specific sectors. I’ll give you an example. For example, like electronic documents for the iron ore sector trade, there’s a high adoption of that technology, one leading company using it, and their rival’s competitors are start using it to enhance efficiency. So, suddenly that becomes like that sector’s requirements, and of course banks will react to that.
So, that sort of technology-led, client-led — like sector-specific solutions — can be observed in the market. But at the end of the day, I rather think that this is less of the sector-specific tools. It’s more of the how does the bank prepare to adjust its product lineup and make a sufficient flexibility for each customer. Every sector has its own kind of unique thing. For example, the insurance sector has totally different to the commodity sectors as well. Even within the insurance sector, each company has different requirements. Now, how much will the bank be able to customize their service according to the company’s requirement?
Gilder
What about sector knowledge? Because one of the things we hear across, not just in corporate clients but all the way from SMEs up to institutional clients, that they want their banks to understand their sector. So, the RM team and the product teams that support the RMs, they really want them to have knowledge of, say, the automotive sector or the agriculture sector or whatever it is. So, how’s SMBC dealing with that from a sector knowledge in your teams?
Yamazaki
In SMBC, we have certain sectors of priorities. We kind of collect those scattered knowledge base across the various departments. For example, the certain debt-originating department or the syndicate department or the research department. We collect all that relative knowledge, knowledge capitals in order to customize the certain service or the products to cater for those specific requirements. Now, I think you’re absolutely right by saying that industry in-depth understanding—that’s where the customers or the treasurers might be filling the gap.
Now, I think it’s extremely important for the banks, and of course, including SMBC, to deepen the understanding. It’s not only the customers. It’s including from their suppliers all the way to the -- our client’s client, the buyers of the clients. So, that end-to-end understanding of how the money flows, where the risk is, that sort of in-depth risk analysis, or perhaps I will frame it like advisory requirements. So, that is something that I feel the clients are willing to see.
Gilder
Yeah. Okay. Another good segue into the next topic, actually, because you mentioned advisory then, and one of the things we’ve been thinking about for a little while is the idea that a new revenue stream for banks can be managing part of their client’s operations, and a natural place to start is in the treasury function. And so, what we’ve seen in the survey data is that actually 80% of respondents are very open to outsourcing risk management and treasury operation activity as a managed service from a bank or another party. And so, from an SMBC perspective, do you see the banking industry pivoting from traditional product offering to an as-a-service offering mindset? And then what kind of new areas do you see evolving over the coming years to help your corporate clients?
Yamazaki
Very interesting kind of aspect. I’m just going to start from drawing some examples from the past. In the past, of course, the treasurers used to sign the check. Every invoice was paper. Wet ink, check signature was there. And then technology evolves, and banks are starting the service of check printing service. So, the treasurers no longer need to sign the check. Now maybe in the frame what you have mentioned, that is like a product sales—check printing service. However, how I see it is that is a service and those kind of mundane routine process can be absorbed by the advanced technology and the bank’s kind of a process as well.
So, that part I will see the technology will push the banks and the relationship between the clients and the bank to absorb more of that routine process. However, the certain core aspects, like how do we react to the crisis, how do you engage the operation line if there’s an area of natural disasters and your supply chain is disrupted, those situations will not be able to be handled by the process, i.e., the bank’s kind of a service. So, I guess there are some areas that banks can push, especially in conjunction with the AI adoption, but there are areas that treasury function will be far more essential for the corporates to continue.
Gilder
Yeah. You mentioned AI there, and I’m curious what role is AI going to play in this, and it’s obviously an exciting area and a bit of an unknown as well. But in the survey, you know, 92% of respondents said that they were going to be incorporating AI into their treasury operations, and we explored two areas. One is AI financial advisor that recommends actions in response to financial issues. So, a kind of an advisory tool. And then the other one was AI treasury assistance to help provide kind of bespoke insights. And so, is that an area where you would see the bank developing tools that they would deploy to their corporate clients, or do you think that’s up to the corporate clients themselves to develop that kind of capability?
Yamazaki
To answer this question, probably I would see what’s happening in the banking industry. In the banking industry. What I see, especially in conjunction with the treasury management service kind of providers, we see that AI adoption, especially in the FX side. So, let’s say six months, US dollar interest rate has been expected to move and also moved as well. Now FX market has changed. When the sharp moves are observed in the market, we will ask the AI engine, or the corporates will ask the AI engine, what is the best time to hedge my long position in three months later? Give me the options. And AI engine might be able.
That could be provided by banks or other vendors as well. Then the AI engine will give three options, and the treasurers will decide which options will be valid, and the orders will be given to the bank. That entire kind of a process, if it’s more digitized and if it’s connected, I think that will help treasurers a lot. So, that’s one of the examples how the AI can be helping the treasurers.
Gilder
All right. Great. I think that’s a super interesting area, and I’m looking forward to seeing how that evolves over the coming years. Maybe we’ll finish with what has been a hot topic for a number of years now, and that’s ESG. And so, one of the top items in the survey—in fact, it was the number one item in terms of what treasurers were concerned about both today and five years forward. And that was sourcing ESG-focused investments, where 70% of banks were saying that that’s a topic of focus for them today and into the future, but 74% face challenges in getting access to those types of investments. So, do you see that kind of demand in your client base, and what are banks doing generally to meet that demand, and maybe specifically, what’s SMBC doing?
Yamazaki
SMBC, we are very keen to provide the green financing and not only the financing part, but also the green trade financing or green deposit. These are the combination of the existing loans or the deposit products added on that ESG requirements. To just simply put, if you meet those A, B, C requirements and depending on the companies as well, and if you will need to kind of verify that down the road—if you meet those, the conditions will be A instead of the simple products of condition B. Typically, it will be more preferable, and at the same time, it will also help the clients to be more green. So, again, not only SMBC, but most of the banks are rolling out those products, and I think it will be more common in the future, but right now it is gaining the momentum very fast.
Gilder
Yeah, we definitely see it in our client base as well. I guess with that comes the associated risk of greenwashing and making sure that you understand where that money is being deployed by the client and ensure that it does meet those criteria that you’ve set out for it. So, it’s a challenge ahead.
Yamazaki
Absolutely. There’s a lot of challenge going forward. However, this is a huge area that I think not only the banks but entire economy world is challenging, and of course, banks have a big role to play in this ESG field.
Gilder
Great. Well, thank you. That brings us to the end of the questions. Really appreciate your insights, Yamazaki-san, and thank you for joining us here today.
Yamazaki
Thank you again, Andrew, for having me.
Gilder
To explore the Voice of the Treasurer Report in more detail, you can download a copy from the description in the link from the podcast.
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