The Banking Executive Magazine - Septmber Issue 2021

M&A BOOM FOR BANKS AS M&A AND PANDEMIC BOOST CORPORATE FX NEEDS A boom in corporate deal making, surging input costs and a focus on short-term cash flows in the pan- demic have sent companies rushing to hedge their currency exposures this year, giving a boost to banks that sell foreign exchange products. Corporate treasurers say the pan- demic, which sent revenues tanking in 2020 before this year's sharp re- bound, has encouraged many to hedge currency risks more fre- quently. Relentless supply chain pressures, and a sharp rise in raw material and other input costs that are mostly de- nominated in U.S. dollars, are rea- sons for companies to lock in prices too. And a surge in mergers and acquisi- tions as the recovery takes hold is also lifting corporate demand for for- eign currencies. Global deal making is running at a record high this year, with $3.9 trillion of deals already transacted by early September, ac- cording to Refinitiv data. Multinational firms are among those to have increased their foreign ex- change (FX) market activity. A corporate treasurer at one FTSE 100 firm said its auditors had told the company to hedge its exposures more effectively and "ensure that we only hedge the visible stream of rev- enues". This has resulted in more volumes and smaller deal sizes, a develop- ment seen widely - treasurers say the average hedging deal among other large British firms has shrunk to be- tween $5 million and $10 million, from $20 million pre-pandemic. "Corporate hedging activity has gone up in recent months because (com- panies') time horizons to hedge their FX exposure have shortened," said Naresh Aggarwal, policy director at the London-based Association of Corporate Treasurers. REVENUE BOOST It is proving a boon for banks' cur- rency trading desks, offsetting a re- cent drop in revenues from investor clients. Activity by financial market players, including asset managers and hedge funds, surged last year as the pan- demic uncertainty boosted FX volatility, but in this year's calmer the BANKING EXECUTIVE 26 ISSUE 153 SEPTEMBER 2021