Commercial banks are slowly gaining market share in the business of selling short-term investments to companies looking to temporarily park their cash, according to a recent study.
The study of 381 companies with revenues over $100 million, by Treasury Strategies Inc., a Chicago research firm, revealed that sales of short-term instruments, such as money market mutual funds and commercial paper, were down 6% at securities dealers this year. Commercial banks, along with mutual fund companies and investment advisers, were able to pick up some of the slack.
But banks still lag far behind securities dealers. Dealers sold 63% of short-term investments, followed by capital markets groups, with an 18% market share. Banks sold 6% of short-term investments bought by companies - 4% in sweep accounts and 2% in demand deposits.
Though they are making inroads, banks still have a way to go to become big players in this business, said Anthony J. Carfang, a partner at Treasury Strategies. To do that, they have to get over their love affair with deposits, he said. The survey revealed that large corporations invest $41 for every $1 they deposit.
"Banks have been aggressive providing liquid products," Mr. Carfang said, and are getting more creative. Most large commercial banks now offer a variety of products and distribution channels to give companies liquidity, such as sweep accounts that invest remaining cash deposits into money market mutual funds at the end of the day.
First Chicago NBD, for example, has developed several alternatives to deposits. In addition to sweep accounts, its offers on-line investing in money market funds, said Deborah L. Edwards, a first vice president there.
"Corporate downsizing has reduced many corporate treasury staffs, and many companies don't have the expertise or time to buy securities how they used to," Ms. Edwards said.
Banks still have a long way to go in the short-term investments business, Mr. Carfang said. Only 2% of corporate liquid assets is in demand deposits, according to the survey. Mr. Carfang said many bankers are tenaciously trying to hang onto that last 2%, even though companies are moving away from simple deposits.
At First Chicago, corporate customers are invited to seminars that recommend short-term cash investment options, Ms. Edwards said. Customers are told what investment instruments are available and the most lucrative at different times during the day, and whether they should manage the money in-house or have the bank do it.
Corporate customers are getting more sophisticated with investing their cash, Ms. Edwards said, as they feel more pressures from different areas.
The recent flurry of initial public offerings infused many companies with large amounts of cash very quickly, she said. Because companies do not want that money sitting around dormant, many go looking for short-term investments, she said.
Banks are on equal footing with securities dealers in the short-term investments business, said Thomas Logan, treasurer of Basic American Inc., San Francisco, and chairman of the Treasury Management Association.
"People are largely indifferent who they buy from," Mr. Logan said. Since much of this business is relationship-driven, if a treasurer is already working with a banker, it is easy to buy a short-term investment from the same person.
With recent high-profile investment losses at large entities such as Orange County, Calif., Procter & Gamble, and Pier One, some treasurers are questioning the wisdom of having an internal investment specialist, Ms. Edwards said.
Indeed, Mr. Logan said he has seen many smaller companies outsource treasury management to banks, because banks already have a cash management role.
Kent Crocombe, treasurer at Aladdin Industries Inc., Nashville, said he has noticed banks selling these instruments more aggressively than in the past.
"Six percent is only 6%," he said of banks' share of the short-term investment market, "but it is step in right direction."
