House of the year, Malaysia: CIMB

A notable common feature of the winners of this year’s Asia Risk regional bank awards has been a commitment to improving risk management beyond the minimum levels put forward by local regulators, and CIMB’s Malaysia business is no exception. Global regulators identified liquidity risk as key driver of the financial crisis and as a result brought in two new standards: the net stable funding ratio and the liquidity coverage ratio.

Both NSFR and LCR are designed to push banks away from a reliance on short-term wholesale funding and look for stable sources of long-term funding, with retail deposits getting particularly favourable treatment, for example. CIMB’s treasury team has risen to the challenge; despite the Bank Negara timetable requiring local banks to reach 80% of the LCR requirement in January 2017 and 90% the following year CIMB is already over 100%.

Likewise for NSFR: the central bank required full compliance in January 2018 but CIMB is already over the 100% level. Part of this is due to an impressive 25% year-on-year increase in retail deposits but also by innovative structuring.

In the second half of 2017 CIMB securitised a 2 billion ringgit ($475 million) mortgage and hire purchase portfolio. While securitisations are not unknown in Malaysia this deal is important; not only did it enable CIMB to obtain funding at lower than wholesale rates, but also the bank’s commitment to continuing to diversify funding sources suggests this product could become a significant part of the local financial market.

“Our focus going forward will be to continue to diversify our funding sources and conduct securitisations as and when we see a good opportunity in the market – in this instance we managed to obtain funding that was 20–30 basis points below the wholesale rate,” says Jennifer Yong, executive vice-president for structured and banking products within CIMB’s investment banking unit. “Ultimately we need to meet the NSFR requirements and as a result of the funding programme we are already in compliance for rules that don’t come into effect until 2018. I don’t have an exact figure for our future funding mix but I expect that securitisations will play a bigger part in the future.”

CIMB has a long record in the Islamic derivatives market and the last 12 months saw the bank expand its volumes in this asset class significantly. CIMB Islamic is an active market-maker in Islamic rate derivatives such as Islamic profit rate swaps (IPRS), Islamic cross-currency profit rate swaps (CCPRS) and Islamic forex forwards. While previously all issues had been denominated in ringgit, there was demand from Middle East investors – typically government-linked investment funds are limited to sharia-compliant investment – for other currencies, typically US dollar. And, according to Yong, the results have been spectacular.

“Last year we made a big push into the foreign currency Islamic interest rate derivatives market, with 90% of our foreign currency CCS and forex IRS transactions actually being Islamic-based CCPRS and IPRS,” says Yong.

She says the reason for this success was simple: CIMB Islamic realised that within the Gulf region there was massive untapped demand for these types of products.

“We expanded our customer base in the Middle East by transacting with a number of supranational names, which because of their investment rules mean they can only put money into sharia-compliant structures,” she says. “Since we have already been active in Malaysia with a full range of Islamic derivative products we were able to use this knowledge to sell to offshore clients.”

The other major innovation for CIMB in the last 12 months was in the ringgit bond futures market. While globally rates at the longer end are heading upwards in tandem, CIMB instead expects the ringgit curve to flatten in five years’ time due to supply issues. In 2017 total outstanding government debt is 66.75 billion ringgit, but this is planned to shrink to 33 billion ringgit in five to seven years’ time. This debt profile is unlikely to change given that the Malaysian government was aiming to achieve a balanced budget by 2020 (although there is widespread expectation that this will not now be realised until 2022).

“Based on these projections we can expect the supply of government bonds to drop dramatically and as a result the yield curve will flatten,” says Yong.

Therefore, CIMB has been recommending that clients enter bond forwards. So if, for example, a firm buys a 30-year bond, combined with a five-year forward, clients don’t have to put in any upfront cash but can lock in the yield.

“This enables clients to better manage future cash inflows because they can lock in currently maturing products at high yields,” says Yong.