CIMB continues to be dominant in the Malaysian derivatives market with notable wins in its structured credit and foreign exchange derivatives businesses over the past 12 months, in addition to continued success in its rates and equity derivatives franchises.
The bank saw a significant increase in demand for credit-linked notes (CLNs) over the awards period – issuing over $250 million in notional – while adding a number of new CLN clients. The ability to manage and warehouse exotic structured credit exposures internally allowed it to offer local currency denominated products to clients, resulting in an uptick in volume from private banks, asset managers and other institutional investors.
In one notable deal, the bank sold an enhanced-basis CLN referencing G7 sovereigns for 100 million ringgit ($24 million) to an institutional investor. The one-year note leveraged exposure to a long/short credit arbitrage strategy without being exposed to any principal loss upon a default of the underlying credit.
Another notable trade involved a short-dated CLN linked to a perpetual instrument issued by an oil and gas credit. CIMB was able to issue the note for a shorter tenor than the underlying perpetual security and put in sufficient structural features to make the investor comfortable with the risk despite it referencing a perpetual subordinated instrument.
It was also landmark year for the bank's forex derivatives business as volumes increased close to 25% year-on-year, driven by the bank's ability to warehouse and manage exotic risk. CIMB also saw an increase in its corporate client base using forex options to hedge exposures. For the majority of the period, volumes mainly came from importers as the US dollar strengthened, while the majority of exporters opted to stay on the sidelines. This trend reversed towards the end of the period, with exporters becoming more active as the US dollar weakened.
"Over the past year, accumulator and dual currency investment [DCI] volumes have increased significantly and our warehousing capability enables us to provide sharp pricing during periods of high volatility," says Chu Kok Wei, group head of treasury and markets at CIMB. The bank says it has issued close to $300 million notional of accumulator notes over the past 12 months.
"Unlike most accumulators we pushed a daily fix structure so the client's hedging horizons and hedging exposure tend to be clearer," says Chu.
The bank also saw strong interest in rates-linked structured investments, selling close to 670 million ringgit over the period. While the bank did not introduce any new variations, the structures were completely warehoused internally, allowing the bank to offer attractive pricing and yields of up to 6.70% for a five-year structure with a non-call period of six months. On average, the coupon rate offered was around 5.40% across all sales channels.
CIMB was also an active issuer of Islamic interest rate derivatives such as Islamic profit rate swaps and cross-currency profit rate swaps (CCPRSs). In 2016, CIMB extended its capability to provide liquidity in long-term CCPRSs, trading a 30-year CCPRS with a notional of 100 million ringgit with a local client.
In equity derivatives, the bank sold over 1 billion ringgit in notional of principal-protected autocallable structured notes, expanding offerings to include shares listed in Singapore, US, Europe and Australia. As equity markets declined in the third quarter of 2015, CIMB saw an attractive entry point and offered a three-year with principal protected structure referencing a basket of three blue chip stocks. The product proved popular with clients, with sales of 335 million ringgit and offered a coupon rate ranging from 7% to 9% per annum depending on basket selection and pricing.
Despite a challenging operating environment, the bank posted its highest ever operating income in 2015, underpinned by enhanced risk management. To facilitate risk appetite, the bank adopted risk acceptance criteria for certain sectors and conducted several stress tests across sectors such as oil and gas, palm oil, real estate as well as assuming various currency movements. The bank also fine-tuned its funding strategy to better manage its liquidity profile, choosing to focus on sustainable retail deposits rather than corporate deposits in order to improve net interest income and profitability. This resulted in retail deposits growing by 8% year-on-year versus the market average of 3%.