A New Wave of Treasury Centralisation in Asia
Although treasury is a small function, its role in ensuring that the organisation remains liquid, and that cash is available at the right place, at the right time and in the right currency is crucial to the sustainability of the business. Treasury centralisation into regional or even global treasury centres can be an essential way to improve access to liquidity and manage risk at a group level, whilst standardising processes and controls, and rationalising bank relationships, accounts and connectivity. This is not a new phenomenon, but there has been a significant uptick in the number and variety of organisations now centralising treasury in locations in Asia, both amongst global and Asian multinationals.
Drivers of centralisation
As Asia continues to build on its reputation as a growth powerhouse, the number of global multinationals attracted to the region continues to increase. At the same time, Asian corporations that are expanding cross-border, both within the region and beyond, are looking to achieve greater operational and financial efficiency.
There is a variety of reasons why treasurers or CFOs may decide to establish a regional treasury centre but these ultimately, they are looking to enhance efficiency and effectiveness:
|a. Efficiency |
|Many countries in Asia continue to be amongst the fastest growing economies globally, and no company, whether headquartered overseas or locally, can afford to miss out on the opportunity that this growth presents. By setting up an regional treasury centre with specialist treasury resources, processes, controls and technology, treasurers can support geographic expansion, whether organic or through M&A, and avoid replication or fragmentation of activities, which has an impact on liquidity, risk and cost. Centralising bank relationships and control over cash creates economies of scale, and streamlines connectivity. Access to specialist treasury resources is limited in parts of Asia where treasury expertise is at an early stage of development, so establishing a regional hub enables treasurers to leverage talent pools in more established centres of treasury excellence, such as Singapore and Hong Kong. |
|b. Effectiveness |
|For many companies, access to finance is essential to facilitate growth. By setting up a regional or global treasury centre, treasurers have better visibility and control over group liquidity. This helps to reduce total borrowing, and the cost of borrowing, by using group liquidity more effectively, and enables treasurers to negotiate financing centrally, and leverage the group company's credit rating, leading to better pricing. Similarly, treasurers can take a consolidated view of risk and hedge FX, interest rate and commodity risks at a group level where appropriate, providing a single point of access to the market. Treasurers can also work with the tax department and senior management to organise the business and its treasury activities as tax-efficiently as possible. |
Managing regional diversity
The benefits and drivers of treasury centralisation are common across regions; however, while establishing a regional treasury centre is relatively straightforward in regions such as North America and Europe where there is a common currency and cohesive market and regulatory conditions, the challenges of doing so in Asia may be more numerous and profound. In particular, Asia has a diverse marketplace, and the regulatory conditions, market infrastructure and practices, business conventions, cultures, languages and currencies differ across markets. Consequently, treasurers setting up a regional treasury centre to achieve operational, risk and liquidity need to take into account the nuances of doing business in Asia without compromising these objectives.
One issue that treasurers first need to consider is the location(s) of one or more regional treasury centres. An initial consideration is the geographic scope of the organisation and where its strategic centres are sited. For companies operating across all parts of Asia, treasurers will often look to place their regional treasury centres where they can cover the three major axes of growth in Asia: Greater China, including Hong Kong and Taiwan; South East Asia and ASEAN, which includes Singapore, and South Asia, including India and Bangladesh.
"Setting up centres to cover these (growth) axes gives treasurers the anchor points they require to manage liquidity and risk effectively, especially if these are in close proximity to their business operations."
Lim Him Chuan, Group Head of Product Management, Global Transaction Services, DBS
Singapore and Hong Kong are traditionally the most popular locations for establishing regional treasury centres in Asia, with liberal regulatory and currency controls, an attractive tax environment, a deep talent pool, efficient infrastructure and good international communications. However, these locations have different characteristics, and treasurers will choose the location(s) that best meets their strategic growth priorities. Hong Kong, for example, offers a huge capital markets base, and both proximity and connectivity with trading partners across Greater China. Singapore is preferred by companies that have existing business or strategic ambitions in South East Asia, and the city also has 61 preferential trading arrangements in place, compared with only 6 in Hong Kong.
Shanghai has also become more popular as a location for treasury centres in Asia amongst companies that have major operations both within and beyond China. In particular, these companies are seeking to leverage the advantages of the free trade zones (FTZ), the benefits of which include a streamlined legal framework for trade and investment, access to local and foreign banks, and a growing treasury talent pool. However, China is still on its journey towards financial liberalisation, and treasurers' ability to manage liquidity and risk needs to be guided by prevailing regulatory conditions.
In addition to Singapore, Hong Kong and Shanghai, other potential regional treasury centre locations are emerging, including Kuala Lumpur, Bangkok and various cities in India. Governments in Malaysia, Thailand and India, amongst others, are keen to encourage local and foreign multinational corporations to locate a regional treasury centre in their country, but it is still relatively early days for these markets.
India, Philippines, Thailand and Malaysia, however, are often attractive locations for financial shared services, including payment and collection factories. India, for example, is popular due to its English-speaking financial and technology talent pool, cost-effectiveness and attractive business environment.
Building a successful regional treasury centre
There are a variety of internal and external factors that contribute to a successful regional treasury centre. Corporations headquartered outside Asia, or those that are expanding into new territories, may be less familiar with doing business in Asia, which requires considerable expert support.
Many companies source this advice upfront from consultants during the initial setup, but they need to maintain access to expertise over time, particularly given the diversity and complexity across Asian markets and the pace of market and regulatory change. Consequently, a reliable, expert banking partner with the capabilities, commitment, geographic reach and financial stability is imperative, as outlined in Box 1, both upfront and on an ongoing basis.
"We take a '4D' approach to developing solutions for regional treasury centres with our clients: discover; define; develop and deliver. We employ a structured approach to understanding our clients' objectives and identifying constraints and opportunities to optimise treasury. We then build and implement solutions that are adapted to meet the specific needs of each client, taking into account both currency and future needs, across areas such as optimising capital, mitigating risk and enhancing efficiency."
Lim Him Chuan, Group Head of Product Management, Global Transaction Services, DBS
There are inevitably internal challenges to overcome too, not least ensuring the scope and objectives of the regional treasury centres are clear, with senior management commitment to provide the necessary resources and drive organisational and cultural change. By overcoming these obstacles, and working closely with a trusted banking partner, treasurers can create a centre of excellence that supports the company's current and evolving financial and operational objectives and positions the organisation for growth.
Five steps to selecting a banking partner in Asia
1. Commitment. Banks need to be anchored to Asia, and be able to partner its clients through good times and bad. DBS is headquartered in Singapore, and it has a deep presence, comprehensive solutions and local expertise across the Asian markets in which we operate.
|2. Agility. Asia is changing fast, and each country has its own growth trajectory and market and regulatory priorities. Global banks often lack the agility to respond quickly to these changes, while local banks may lack capacity and depth of investment capability. As a regional bank, DBS has both the agility and capacity to respond quickly yet credibly to changes in our customer requirements, and the markets in which they do business. |
|3. Digitisation. Taking the opportunity to digitise and transform processes in order to improve speed and accuracy, reduce costs and increase scalability is a major driver of centralisation. Working with a bank that has a robust, innovative digital agenda is essential both to streamline connectivity and access solutions and services that accelerate the financial supply chain. Digital innovation an area in which DBS continues to invest heavily, both in-house solutions and in partnership with third parties, to deliver operational and strategic value to our customers. |
|4. Insight. Given the diversity of regulations, currency controls, taxes and business cultures in Asia, treasurers need solutions and services that reflect the nuances and requirements in each market whilst meeting group liquidity, risk and operational objectives. DBS offers local presence and insights in the markets in which we operate, enabling us to offer expert advisory and value-added solutions to our customers. |
|5. Safety. Treasurers need the assurance that cash held in bank accounts, deposits or liquidity and investment solutions, is securely held by a highly-rated partner bank. DBS has one of highest credit ratings of AA- (Moodys) and Aa1 (Standard & Poors), reflecting the strength and resilience of our balance sheet.|
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