Bill Gerber, senior vice president and CFO of discount broker TD Ameritrade Holding Corp., really likes the people at Bank of New York (BoNY). Their expertise in servicing the broker-dealer industry, he says, was the main reason his $1.8 billion (fiscal 2006 revenue) company chose BoNY last year to administer its $2.2 billion credit facility. "If — and I'm not saying this would happen — Bank of New York took its entire broker-dealer business and sold it to somebody else," Gerber says, "we would likely follow its people to their new bank. It's not necessarily the institution we have the relationship with, it's the people. They are the experts who provide us with what we need."
Even now, when credit conditions are easy, banking remains very much a relationship business. Most CFOs and treasurers recognize that when the credit cycle finally does turn, they may need the goodwill of a longtime banking partner to ensure access to capital under less-than-ideal conditions.
"It's not just the fees you're paying today that are important," Gerber says. "It's also knowing that your bank is going to be there when you need it. And you just don't know when those times are coming."
How loyal is TD Ameritrade? When the Omaha-based company chose BoNY to administer its credit facility, it bypassed its longtime lender, First National Bank of Omaha, but only because TD Ameritrade was outgrowing First National's capacity, says Gerber. "We have rewarded First National with our continuing corporate business, such as payroll and accounts payable," he says, "because of our longstanding relationship going back many moons, to when no one outside the greater Omaha area had even heard of us."
Days of Prosperity
Despite such professions of loyalty, there is a new dynamic at work between banks and borrowers. Companies are awash in cash, making them good credit risks capable of driving hard bargains (see "Money for Nothing," CFO, April 2006). But they also have widespread access to new sources of credit: investment banks taking advantage of a 1999 law allowing them to compete with commercial banks; the cornucopia of hedge funds that have sprung up; and the private-equity funds that, despite their name, are now happy to invest in leveraged loans. According to Reuters Loan Pricing Corp., nontraditional buyers, including hedge funds, purchased more than $300 billion in loans last year, up from $50 billion in 2000.
Some firms — like TD Ameritrade — are seizing on this new paradigm as an opportunity to seek out new credit relationships. "We continue to meet with our banks because they're a good source of ideas," says Eileen Kamerick, executive vice president, CFO, and chief administrative officer for $433 million (in 2005 sales) executive search firm Heidrick & Struggles International. "For banks that are interested in talking to us, we'll typically take that call or that meeting." Kamerick says Heidrick & Struggles has considered some merger-and-acquisition deals brought to it this way, although none has come to fruition. "Often bankers know when a business might be a possible acquisition candidate before it is known in the market," she notes.
Others are introducing new rigor to the process of evaluating their banks. Dennis Gannon, research director of the Treasury Leadership Roundtable, says his organization has developed several quantitative tools to help its members — senior finance executives — estimate what their banks earn on various services. That helps them do a better job of divvying up business so banks that provide the most support to the company (by supplying a substantial piece of their credit revolver or other bank borrowings) are rewarded with other, higher-margin business. One tool is a simple risk-adjusted return-on-capital spreadsheet model; another is a credit-versus-fee "heat map" that lets users see at a glance which banks are getting an appropriate amount of higher-margin ancillary business. "I'm surprised at the continued appetite our members have for this kind of help," says Gannon.
He recalls hearing from the treasurer of an oil-and-gas exploration company last year who found that having a profitability analysis made it easier to have difficult conversations with his banks. "He gave the example of a relationship manager at one of his European banks angrily opening a meeting with a long response to being left out of the company's current bond offering," says Gannon. "The treasurer replied by pulling out his team's reconstruction of this bank's profitability with their company, showing that the bank was earning well above its average return and so could afford to sit this one out. He remarked that the conversation 'took a dramatic turn' toward the strategic outlook for business opportunities in the coming years."
No Crying in Banking
These days, of course, worries about bank profitability may ring a little hollow given what the nation's three largest banks earned. Citigroup, despite a 12 percent year-over-year decline in profits, still managed to earn a hefty $21.5 billion last year, while Bank of America (BofA) grew its profits 28 percent, to $21.1 billion, and JPMorgan Chase boosted its net income 70 percent, to $14.4 billion.
With that profitability should come clout. After all, consulting firm Greenwich Associates estimates that the Big Three hold approximately 60 percent of lead corporate-banking relationships and 70 percent of lead credit relationships with U.S. companies.
Yet their grip on commercial-banking business doesn't seem to have translated into unfettered power over customers. For example, when CFOs and treasurers were asked by Greenwich Associates whether such a concentration of wealth raised risk-management concerns, 97 percent of respondents, all from large U.S. companies, said no. Moreover, at many companies the care and feeding of banking relationships does not have the same urgency it did, say, five or six years ago, when credit was much harder to come by. According to the same Greenwich Associates survey of 825 large U.S. companies, fewer than 35 percent now have a formal process for reviewing their banks and rewarding new banking business, down from more than 45 percent in 2004.
"CFOs and treasurers are not as beholden to banks anymore," observes Charles Bralver, executive director of consulting firm Mercer Oliver Wyman in New York. "There are other people they can go to for credit. This makes it much easier to parse their relationship around product, unless they are a weak credit. But even those companies, unless they are really weak, are finding people competing for their business."
Mike Umana, senior vice president and CFO of $191 million (2005 sales) LoJack Corp., a Westwood, Massachusetts-based maker of vehicle antitheft devices, has seen the change up close. "There is no shortage of calls coming in from banks," he says, noting that LoJack is getting pitched not only by smaller banks expanding into his part of the state but also by national banks scrounging for new leads. "It's much different than it was four or five years ago, when it was us going out proactively trying to get some interest in our business."
A Bulging Rolodex
The $64,000 question, of course, is whether companies that have relaxed their procedures for evaluating banks and parceling out business will ultimately rue such laxity. Bank-industry consultants like Bralver say the emergence of new liquidity sources such as hedge funds, along with attendant innovations such as the emergence of a market for second-lien loans, may allow banks and borrowers alike to weather the next turn in the credit cycle better than they might have in the past. "In a downturn, there will still be someone that will want to hold credit risk for the right price," says Kirk Saari, a director in the corporate- and institutional-banking practice at Mercer Oliver Wyman. "And it has become easier and easier for the banks leading these facilities to find investors who will participate in a given loan. It's not just a Rolodex of 100 banks anymore, it's 100 banks and a lot of other people as well."
It would be absurd, of course, to suggest that events could not transpire in ways that do, in fact, drive new investors out of the market. History is rife with examples of financially sophisticated entities, from hedge fund Long-Term Capital Management to energy trader Enron, that collapsed when markets moved in unexpected ways. If events do conspire to drive these newer sources of liquidity out of the credit markets, companies that had come to rely on them could be disappointed. "From the view of corporations, I think some people are going to be sorry because they won't have that traditional bank relationship to fall back on," cautions Bralver.
"Another thing that treasurers and CFOs need to be aware of is that if they do run into trouble, the creditors that gather around the table today will be a more diverse and complicated group than it ever was historically," adds Michael Corbat, head of the Global Relationship Bank at Citigroup Corporate and Investment Banking. "In the old days, you'd get around the table with your banks and your interests were very aligned. The banks wanted their money back, they expected interest, and provided they had faith in management, they would probably be willing to lend more." Today, Corbat says, the table is ringed by banks, hedge funds, private-equity firms, and activist shareholders, and each of those entities may have different interests. "As we go through the credit cycle, it may be more difficult to get those interests aligned, or certainly to get them aligned in as timely a fashion as we used to. Companies need to be prepared for and have an appreciation for that."
All of which helps to explain why Gerber cites loyalty as one of the hallmarks of TD Ameritrade's banking strategy. "Money is a commodity these days," he says, "but your banker is not."
Randy Myers is a contributing editor of CFO.
Plenty of banks sell mortgages. Far fewer keep them on their books, preferring to sell them to other investors more comfortable with their risks. Now that larger banks have developed sophisticated risk-adjusted return models that demonstrate that commercial lending isn't particularly profitable, could they one day apply the mortgage-lending approach to that side of the business?
"If you're an enlightened bank that recognizes that holding corporate credit is not the greatest way to generate high returns, you also recognize there are investors out there who are much better end holders of that risk," says Kirk Saari, a director at consulting firm Mercer Oliver Wyman, adding that those investors may have capital, leverage, and tax advantages over banks, and lower cost structures because they aren't as heavily regulated.
Still, Saari concedes that for the corporate credit market to undergo such a transformation, banks would have to reach a consensus that holding corporate credit is not good, and corporate borrowers would have to become convinced that nonbank investors would not pull their lending capacity during downturns. In the current buyer's market, don't look for any big changes; many corporate borrowers still have the power to insist that their banks lend them money in exchange for getting other banking business. — R.M.