Elevated Cash Concentrations on Balance Sheets to Continue: AFP Survey

Share of corporate cash held in bank deposits rises to unprecedented levels.

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Association for Financial Professionals

Jul 10, 2012, 01:00 ET

WASHINGTON, July 10, 2012 /PRNewswire/ -- According to data released today by the Association for Financial Professionals (AFP) and underwritten by RBS and RBS Citizens, short-term corporate cash is increasingly moving towards banks, with bank deposits now accounting for 51 percent of short-term corporate investment balances. Findings from the 2012 AFP Liquidity Survey show the highest level in the survey's seven-year lifespan, nine percentage points above last year's findings. As recently as 2006, the average allocation was 23 percent.

(Photo: http://photos.prnewswire.com/prnh/20120710/DC37282-a)

(Photo: http://photos.prnewswire.com/prnh/20120710/DC37282-b)

This significant jump reflects elevated corporate investment in ultra-safe vehicles since 2007, with company investment policies reducing the types of permitted short-term investments. The survey showed that 74 percent of corporate cash balances are now held in one of three traditional investment vehicles: bank deposits, money market funds and U.S. Treasury securities.

"Today, companies are clearly seeking safety and soundness," said Jim Gifas, Head of Treasury Solutions, RBS Citizens. "Across the board, we see that the primary focus is on preservation of capital, and treasurers and CFOs are eager to see how this is being managed on a global scale."

"Many of the themes emerging from the survey re-affirm what we are hearing from our clients every day," said Julian Oldale, Head of International Cash Management, North America at RBS. "Companies are increasingly seeking market insights and guidance on how to navigate today's challenging environment. We sponsored this survey to help provide timely and relevant information that treasury decision-makers need to do their jobs."

Companies are continuing to increase cash balances, with 41 percent of survey respondents reporting that their organizations held greater cash balances during the first quarter of 2012 than in the first quarter of 2011. Fewer than three in ten indicate their organizations reduced cash and short-term investment balances during that same period.

Rather than exclusively building cash balances as a buffer, some companies have deployed cash to make opportunistic investments in operations or acquisitions, respondents said. Of companies that increased cash balances, 61 percent had more cash because they generated higher operating cash flows while 22 percent increased cash by accessing debt markets. Among respondents who saw lower cash balances, 30 percent said it was because their organization increased capital expenditures while 25 percent had taken the opportunity to repay or retire debt.

The high concentration in bank deposits may escalate if reforms hinted at by the U.S. Securities and Exchange Commission become effective and lead corporate treasurers to cease investing in money market funds (MMFs) or trim their MMF holdings. The reforms that have been discussed include a mandated floating net asset value, redemption holdback provisions, or a requirement for funds to create capital reserves. The AFP survey indicates that if any of these reforms were to become effective, a minimum of 66 percent of organizations would stop investing in money funds or trim holdings, creating outflows in need of safe investment.

"In these uncertain times, it is clear that protecting principal is the main concern of corporate treasurers," said Jim Kaitz, AFP's president and CEO. "This is creating a virtuous/vicious cycle of increasing cash balances and also flows to banks."

Looking ahead, respondents anticipate elevated cash levels to continue. Forty-six percent expect balances to remain about the same over the next year while 32 percent of respondents expect even larger cash balances. Only 22 percent of respondents expect balances to contract over the next year. Among respondents who anticipate their organizations will increase cash holdings, 78 percent believe this will be the direct result of increased operating cash flow. Forty-six percent of financial professionals who believe their organizations will reduce cash balances say the holdings will decrease because of greater capital spending.

About the Survey
AFP conducted the survey, underwritten by RBS and RBS Citizens, in May 2012, generating 391 responses. The survey respondents were senior finance and treasury executives from a broad range of companies—typically U.S.-based multinationals with a median of $2 billion in revenue. The typical AFP member works at an organization with complex treasury operational needs that can be met only by large regional banks and global banks.

Download key findings from the AFP 2012 Liquidity Survey on www.afponline.org/liquidity

About AFP® (afponline.org)
The Association for Financial Professionals (AFP) is a professional society headquartered outside Washington, DC, that provides members with news, economic research and data on the evolving world of treasury and finance, certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

About the Royal Bank of Scotland Group (RBS) (rbs.com)
The RBS Group is a large international banking and financial services company. Headquartered in Edinburgh, the Group operates in the United Kingdom, Europe, the Middle East, the Americas and Asia, serving over 30 million customers worldwide. The Group provides a wide range of products and services to personal, commercial and large corporate and institutional customers through its two principal subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Citizens, Charter One, Ulster Bank, Coutts, Direct Line.

About RBS Citizens (citizensbank.com)
RBS Citizens, N.A., is a subsidiary of RBS Citizens Financial Group, Inc., a $130-billion commercial bank holding company. RBS Citizens Financial Group is headquartered in Providence, R.I., and through its subsidiaries has more than 1,460 branches, approximately 3,800 ATMs and approximately 19,200 colleagues. Its two bank subsidiaries, RBS Citizens, N.A., and Citizens Bank of Pennsylvania, operate a 12-state branch network under the Citizens Bank brand in Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the Charter One brand in Illinois, Michigan and Ohio.