We provide the bank’s corporate clients with the banking services they need on a daily basis to run their businesses. These services include access to short-term finance, trade finance, and particularly cash management services. For large businesses, these processes can be extremely complex, and we have the expertise to help clients with them.
At BNP Paribas, our corporate and transaction banking team is a coverage team as well as a business line team. Business line people focus on particular areas of work, while coverage teams market all of the bank’s offerings to particular clients. So as well as providing our own services, we might introduce a client to one of our colleagues from a different part of the bank if we feel our colleague’s team could help that client.
We work a lot with Fixed Income and with Global Equities and Commodity Derivatives, who deal with bonds, foreign currencies and commodities, and with Corporate Finance, who provide clients with strategic advice on large transactions, like mergers and acquisitions deals and IPOs. We also interact with Structured Finance, who provide clients with various sorts of specialist lending. We have about 70 people in our team in London, and we work for about 100 clients.
Let’s take as an example cash management for a company in the retail industry with a number of shops across Europe. We might collect cash from all of their shops, and put it into bank accounts. We might convert the cash they hold in one country into another currency, pool it with all the other cash they hold throughout Europe, and put into an account in a country where deposit interest rates are currently most favourable. We might also pay bills, suppliers’ charges, or employees’ salaries for them.
We would give the client a daily cash statement that says, for example, in Germany and Poland you’re in surplus and in the Czech Republic and Italy you’re in deficit, and all together you have a net surplus or a net deficit of X amount of money. Having this statement will help the company manage their finances. They may also have access to a computer system of ours that enables them to see at any time where exactly they’ve got cash, or debt, in each country across their network.
You can think of our cash management function, and our other services, as like those the Post Office provides – a company could deliver all its own letters itself, but it would be a lot more expensive and difficult than using the Post Office’s specialist infrastructure.
We generate money in two ways. Firstly, we make money as a business line from the services we provide for clients. For example, if we lend clients money, we charge them interest. For cash management and trade finance services, we charge clients fees. At the same time, we’re also selling products to clients provided by other teams here and therefore enabling another part of the bank to make money.
Some of the services we provide bring in more revenue than others. Most companies want banks to lend to them, but doing so is expensive for us. We can’t charge a very high rate of interest on a standard corporate loan and there are costs to us of providing the loan because we have to borrow that money from the markets and pay interest ourselves, all of which may mean that at the end of the day we don’t make any money at all on the transaction. So when we lend to clients, we’ll encourage them to give the bank other things to do which will enable us to earn more revenue without having to lend more money. These could include cash management, underwriting bond issues, and advising on complex transactions. In banking, these services are known as ancillary business.
I think one of the most interesting transactions I’ve been involved in was one where a very large company was buying another very large company for $22 billion. We, along with some other banks, had to structure the loan and provide that $22 billion. The loan was then very rapidly refinanced by bond issues. The borrower wanted to fund itself in this way in the long term because bonds are generally a cheaper form of corporate finance than bank loans.
As a result of the acquisition, the company went from being very cash rich to being heavily indebted. The company was therefore forced to attempt to extract as much cash as possible from all its different subsidiaries, including by borrowing more money through them. We had to assess which type of debt finance instrument would be the best way to raise money in each jurisdiction where the company had a subsidiary. Some countries have regulations about how much finance a company can raise there and in what currencies and from whom, or about how much debt a company can take on in total, or about how much cash a subsidiary can pass on to a parent company.
I enjoy dealing with fairly fast moving markets, where lots of different things are happening and we have to react quickly.
I also enjoy the fact that we get to deal with a variety of businesses and meet many different sorts of people, while also interacting with experts all around the bank who know a great deal about a particular subject of interest to our clients.
We train graduates to assess the risks that we run in lending money to companies, which means understanding how companies work, what drives their businesses, and to what extent they’re likely to be affected by economic ups and downs. For example, they learn to analyse things like the working capital cycle so that they’re able to evaluate whether a company is capable of generating cash and remaining solvent.
Wherever graduates end up at the bank, it’s very useful to get the training in credit analysis that we offer here because throughout their careers they’re going to be making credit decisions so they need a sound understanding of the risks involved.
There are some perpetual hot topics like how we can cross-sell more of the bank’s services to the clients we deal with, and how we can best protect ourselves against risks when we lend.
One thing that’s very important at the moment in particular is the changing dynamics of banking. All banks will be regulated differently in the future, and more rigorous rules about how much capital we hold will mean that we will either have to lend less money to clients or charge them more for it, or a combination of the two.
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