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European multinationals hunt for yield as cash balances surge


With the ECB maintaining negative deposit rates until September, treasurers continue using derivatives to boost returns on expanding European cash piles.

by Anmol Karwal

Published: May 24th 2022

Cash balances are ballooning at European companies, increasing pressure on treasurers to boost returns, amid surging inflation and negative deposit rates in the Euro area. 

The 12 European non-financial companies with the largest cash & investment holdings in the EuroStoxx 50 & FTSE all-share indices increased cash by a total of €35 billion in the first quarter, to a record high of €218 billion. But in the Eurozone, companies have to contend with a deposit rate of minus 26 basis points, according to European Central Bank data. 

This contrasts with much higher positive interest rates in the US, while the ECB says that it will keep deposit rates negative until September.

Increasingly, the go-to solution is to use derivatives to swap euro cash assets into dollars, while hedging the FX risk. The online payments giant, PayPal uses this approach to boost returns on its $19.27 billion of customer accounts, much of it in the Eurozone. Such derivatives are normally excluded from hedge accounting treatment on company balance sheets. 

Expanding Cash balances

Consider the French multinational oil and gas company, TotalEnergies. As the price of crude oil surged to new highs, Total’s cash & cash equivalents increased by $9.9 billion or 46.5% to $31.2 billion in the first quarter, highest in the last six years. 

According to the company, “swaps are used to attempt to optimise the centralised cash management of TotalEnergies. Thus, the sensitivity to currency fluctuations which may be induced is likewise considered negligible.” This has helped the company to earn an effective yield of 1.26% on its cash and investment holdings of $35 billion as compared to 1.11% last year. 

TotalEnergies increased the notional amount of currency swaps and forward exchange contracts by three-fold to $ 9.76 billion at the starting of the year as compared to only $3.32 billion last year. The company declined to comment further. 

Other European oil and gas giants such as Eni SpA, Royal Dutch Shell and British Petroleum (BP) reported a 63.1%, 3.7% and 12.1% increase in cash & cash equivalents to €13.46 billion, $38.36 billion and $34.4 billion, respectively, in the first quarter of 2022. According to year-end disclosures, the companies allocated more than three quarters of cash & cash equivalents to short term bank deposits, money market funds and repurchase agreements. However these companies don’t disclose the use of swaps to boost returns.

Despite negative interest rates in Europe, treasurers have been able to generate returns well above in the positive territory for the past many years. German automakers including Volkswagen, BMW and Mercedes expanding exposure to low volatility total return funds, thereby generating an Effective Interest Rate (EIR) of 2.04%, 0.76% and 0.71% in 2021, respectively. 

In the latest quarter, BMW and VW reported a 29% and 19.2% increase in cash holdings to an all-time-high of €20.6 billion and €30.3 billion, respectively. On the contrary, their rival, Mercedes Benz bucked the trend as cash & cash equivalents reduced by €5 billion or 22% to €17.95 billion during the same time period. 

Meanwhile, industrial giant Siemens earned an EIR of 1.97% on cash and investments of €12.1 billion according to analysis of the company’s half-year results. The company has €6.2 billion of notional interest derivatives outside the scope of fair value accounting. According to Siemens, “the interest rate hedging contracts used by Siemens AG serve mainly to hedge against interest rate risks and to optimize the interest result in accordance with internal interest rate benchmarks”.

Nowhere to hide? 

As central banks across the world adopt monetary policy tightening strategies to tame inflation, yields on government and corporate bonds have significantly increased since the start of the year. One option is to invest in longer-duration securities in order to boost investment returns instead hoarding cash. 

While US technology giants such as Apple have amassed large bond portfolios that dwarf their cash holdings, European treasurers are sceptical about this strategy. The 12 Europe-based multinationals analysed by EuroFinance keep 75% of their investments in cash with the remainder in securities.

Given the heightened uncertainty around the level and timing of benchmark interest rate hikes by the ECB, that comes with a duration risk, they face a risk of a decrease in market value of fixed-income investments due to an increase in interest rates. 

This is already happening in the US. According to EuroFinance analysis, US technology companies, suffered unrealised mark-to-market losses of $13 billion on bonds in their investment portfolios in the first quarter of 2022, during which time they sold $37 billion of bonds. As interest rates continue to rise then treasurers will have to incur a significant loss on bond portfolios that are sold before maturity. 

Meanwhile, magnified geopolitical risks after Russia’s invasion of Ukraine may prompt treasurers to prioritise liquidity over investment returns, a strategy previously seen at the onset of the covid-19 pandemic