- Global transactions hit record high this year
- Pandemic uncertainty and rising input costs encourage coverage
- Foreign exchange boost helps banks offset decline in investor activity
LONDON, Sept. 16 (Reuters) – The boom in corporate transactions, skyrocketing input costs and the focus on short-term cash flow in the pandemic have caused companies to rush to cover their risks exchange rate this year, giving a boost to banks that sell foreign exchange products.
Corporate treasurers say the pandemic, which saw income plummet in 2020 ahead of this year’s strong rebound, has encouraged many people to hedge against currency risks more frequently.
Relentless supply chain pressures and sharply rising costs for raw materials and other inputs, mostly denominated in U.S. dollars, are reasons why companies are freezing prices as well.
And an increase in mergers and acquisitions as the recovery takes hold also increases business demand for foreign currency. Global deals hit an all-time high this year, with $ 3.9 trillion in deals already closed in early September, according to data from Refinitiv.
Multinational companies are among those that have increased their activity in the foreign exchange (FX) market.
A treasurer from an FTSE 100 company said his auditors had asked the company to cover its exposures more effectively and “make sure we only cover the visible stream of income.”
This has resulted in increased volumes and smaller transactions, a widely observed development – treasurers say the average hedging deal between other large UK companies fell to between $ 5 million and $ 10 million, up from $ 20 million before. the pandemic.
“The hedging activity of companies has increased in recent months because the time horizons (of companies) to hedge their currency exposure have shortened,” said Naresh Aggarwal, policy director at the Association of Corporate Treasurers. based in London.
INCREASE IN REVENUES
This is proving a boon to the currency trading desks of the banks, offsetting a recent drop in income for investor clients.
Activity of financial market participants, including asset managers and hedge funds, increased last year as pandemic uncertainty boosted currency volatility, but in the quieter market of this year they have reduced trade.
Instead, banks are profiting from the increased activity of companies scrambling to cover, borrow more, or expand overseas. JP Morgan (JPM.N), UBS (UBSG.S) and Deutsche Bank (DBKGn.DE) are the top three banks in terms of market share in currency markets of $ 6.6 trillion per day, according to survey from Euromoney.
Market-wide currency volume data shows a lag, but the most recent figures indicate an increase in business turnover.
Business activity in London’s forex markets averaged $ 117 billion a day in April, up 16.1% from six months earlier, according to the latest Bank of England data .
Volume growth for “non-financial institutions,” an indicator of business activity, slightly exceeded market-wide growth of 15.6%, data covering transactions in the largest trading center showed. change in the world.
Deutsche Bank’s global head of foreign exchange Russell Lascala said foreign exchange revenue generated by the bank’s corporate clientele since the start of the year increased significantly from 2019 levels and helped offset reducing investor transactions, although he declined to give figures.
The fierce competition for the business of financial clients has reduced the profit margins of banks. In contrast, businesses can deliver stickier and more profitable business.
Lascala said Deutsche Bank was evaluating unusual but more profitable transactions for businesses “almost on a daily basis.”
“Companies are doing more business, they need to cover more, they are growing, they are borrowing and doing a lot of cross-border transactions. In previous crises, it was very different, they weren’t as strong and played the defense. “, did he declare. .
The world’s 12 largest investment banks generated $ 28 billion in revenue from commodity, bond and currency trading in the first quarter of 2021, up 15% from the previous year, according to data from the Greenwich Coalition. This is the biggest first quarter turnover for banks in the past six years.
Small and medium-sized enterprises (SMEs) have also intensified currency trading.
Laurent Descout, CEO of payment company Neo, said revenue from his cross-border business had picked up after a slow start.
The company had cleared $ 1 billion in trades by the end of August, much of it in the last few months, Descout said, adding that companies were avoiding more complex FX options products for tools. vanilla ‘such as futures.
Supply chain disruptions, signs of rising inflation and uncertainty about the strength of the economic recovery are expected to keep companies’ currency hedging volumes high.
Descout expects treasurers to freeze exchange rates for the “next 12-24 months to support medium-term cash flow and protect margins.”
Reporting by Saikat Chatterjee and Tommy Wilkes Additional reporting by Kate Holton Editing by Sujata Rao and Mark Potter
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