Highlights third-quarter edition

Higher confidence and good actuals

Financial optimism decreased somewhat as compared to the previous survey, but remains strong. Belgian CFOs almost unanimously expect sluggish but albeit sustained recovery of the economy. More than 80% of CFOs report the actual financial results of their organizations are on budget. As in the previous quarter, 40% of CFOs report having outperformed their company budgets. The proportion of CFOs expecting decling cash flows continues to shrink quarter by quarter.

The growing optimism the survey has reported since the first quarter of 2010 has translated in good company results. Demand for products and services have started to accelerate in the third quarter for 1/3 of the surveyed organisations. For the first time since the launch of the survey the expectations on the timing of accelerated demand for products and services did not move backwards. At present, the majority of CFO’s expect the acceleration in demand before or in the second half of 2011.

In spite of the Belgian CFO optimism, other countries – such as the UK – have reported a significant decline in CFO optimism for the third consecutive quarter. Also UK CFOs attach on average a probability of 34% to a double dip, by which we mean several months of contracting growth.

Financial repair accelerates

Contrary to CFO expectations as reported in the 2009 editions of this study, the financial repair that had started slowly in the beginning of this year is further strenthening. Credit conditions have continued to improve faster than initially anticipated.

CFOs now see the cost of new credit as being lower than at any time since the CFO survey started. For the first time since the launch of the survey, more CFOs have rated bank borrowing as being “cheap” rather than “costly”.

The credit crunch seems to have come to an end as well: perceptions of credit availability rose sharply in the third quarter. With interest seen as being at very low levels and credit increasingly available, corporate demand for credit is starting to rise. The attractiveness of bank borrowing is still at its highest level since the start of the survey.

Optimization of corporate financing

The downturn period witnessed significant changes in the balance sheets with corporates running higher levels of cash and liquid reserves and relying more on equity and corporate bonds finance. As a consequence of better credit conditions, the attractivess of bank borrowings as a source for corporate financing augmented.

The general outlook for the future cost of capital stays is optimistic. Half of the CFO’s expect a limited increase in the Cost of capital (WACC) over the next 5 years, due to an augmentation of the long term intrest rates. Both debt and equity are expected to be availlable in the future.

M&A

M&A expectations have been bullish for the past 18 months, and remain strong. In the third quarter, also expectations on private equity activity marked a significant increase. Untill now, these bullish expectations have not yet translated into a very active M&A market.

That might change. More than half of the CFOs expect their organization to be engaged in corporate activity in the next 12 months. Expansion and growth are high on the agenda of the surveyed CFOs: 40% are considering an acquisition or merger, while 10% are looking into strategic alliances.

Debt is cheap and with better than expected company results, many organisations are building up strong cash positions. CFOs that are considering corporate activity report they plan to finance their transactions by means of existing debt facility, new bank loans or existing cash or operating cash flow.

Distrust in domestic politics: a missed opportunity

CFOs confidence in domestic politics and its impact on the efficiency and effectiveness of financial and economic policy has plummeted in the last quarter. Whereas confidence in politics had increased considerably in the first and certainly the second quarter of the year following the elections, we are now again at the depressed levels of 2009. The current political standstill is a missed opportunity, as over 80% of CFOs still see additional room for government action to stimulate the economy. Two thirds of surveyed CFOs report the political uncertainty will impact their business negatively.

Role of the CFO coming out of recession

Coming out of the recession, CFOs spent on average over 55% of their time on their roles as steward and operator: protecting and preserving the assets of the organization by minimizing risk and getting the books right, conducting basic finance operations efficiently and effectively. Going forward, CFOs want to tilt the balance and spend more time as a strategist and a catalyst: influencing the company’s overall direction, instilling a financial mindset to execution and risk-taking throughout the business.

This shift has also translated into changes in CFO priorities: last year’s focus was on ‘transactional processing’, ‘regulation, control & governance’, ‘risk and capital’ and ‘data sourcing and information’. Now top CFO priorities include the efficient organization of the finance function, delivering performance and decision support and providing assistance to strategy and execution.

In addition to the finance-related roles, many CFOs carry additional responsibilities that have little or nothing to do with finance, such as human resources (30%) and information technology (40%). Not easy to keep all the balls in the air.

But the truest measure of CFO clout isn’t span-of-control, it is sphere of influence. Building on strong relationships with their CEOs, CFOs work hard to instill a deep focus on value creation throughout their organizations. For 95% of the CFOs, the CEO acts as an important sounding board. Other executives in the firm are frequently consulted as well for over 60% of CFOs. To provide outside perspective, external advisors (about 40%) and CFO peers (about 30%) are most frequently used resources.

Going forward

So overall, the good news from this quarter’s survey is that CFO confidence remains strong and that actual results are overall in line – or even better – than expected. Many CFO’s are looking for growth opportunities, and the necessary financing is again available and attractive. Going forward, we will continue to monitor the growing divergence between the results of the Belgian CFO survey, and that of other markets such as the United Kingdom where financial optimism has further dipped since the beginning of the year and fear for double dip scenario’s remains present.

Participate to future surveys

The value of the survey data increases with the ability to identify trends and possible turning points. We are hence looking forward to the 2010 fourth quarter Deloitte Belgian CFO survey. This next edition will be conducted end of December.