House of the year, Indonesia: CIMB Niaga

Asia Risk Awards 2017

By any standards it has been a good year for CIMB Niaga. Elevated by Bank Indonesia to the top tier of banks with the highest level of capitalisation, it oversaw a thirty-fold increase in its rupiah interest rate swap business while staying ahead of the pack in terms of structured product innovation.

Prudential supervision in Indonesia comes under the purview of Bank Indonesia and it places banks into ‘books’ depending on factors such as their level of capitalisation, risk management and client base, with a ‘book one’ bank being in the weakest category and a ‘book four’ bank being in the strongest.

For example, a ‘book three’ bank requires minimum paid-up capital of between 10 and 30 trillion rupiah ($750 million to $2.2 billion), while the coveted ‘book four’ appellation needs to hold at least 30 trillion rupiah. In March this year CIMB Niaga was judged to meet the ‘book four’ requirements, a major achievement for the bank.

“Previously there were only four banks that had reached the requirements to become a book four bank and this year we became the fifth. This is a major difference between this observation period and the previous one,” says Ferdinand Wawolumaya, head of trading and structuring at CIMB Niaga in Jakarta.

One downside to the book four categorisation is that it also reduces the rate cap that Bank Indonesia imposes on banks. Once CIMB Niaga became a book four bank, the rate of interest it is able to offer to clients is reduced by 45 basis points and it is here that CIMB Niaga’s structured product capabilities came into play.

In July 2016 the Indonesian government launched an ambitious tax amnesty to repatriate what it estimated to be more than $300 billion that Indonesian citizens had stashed away overseas. Through a combination of incentives and immunity from prosecution, by the time the programme ended on March 31 more than $165 billion of this cash had been returned home, according to the government. These funds then had to be held onshore in certain financial instruments.

“With the amnesty, the tax office is giving a lower bill for money that is being repatriated back into Indonesia. But for that money to be eligible for the discount it has to be invested in a selected range of instruments and products offered by banks, and these are typically deposits. But because of the three-year lock-up period, our clients requested a structured product,” says Wawolumaya.

And that’s what differentiates CIMB Niaga from other Indonesian banks, he says: “We are able to offer structured products whereas even other book four banks can only offer deposit accounts or bond investments for the tax amnesty.”

The head of trading is also proud of the three-year product duration, which is way ahead of the typical six-month structures that are sold in Indonesia.

“CIMB Niaga is the leading bank in Indonesia to issue structured products with a tenor of three years. We believe no other bank is offering a product of this duration,” says Wawolumaya.

The tax amnesty product proved popular, achieving volumes of about 800 billion rupiah, and contributing to a 129% year-on-year increase in rupiah-denominated structured product sales for CIMB Niaga. It additionally provided a fillip to CIMB Niaga’s financing needs.

“When we entered book four, the cap of the deposit offered to clients was lowered by 45 basis points, but by issuing the structured products we are able to offer clients something that is above the rate cap,” says Wawolumaya.

The tax amnesty products are based on the Jakarta Interbank Offered Rate (Jibor) so when CIMB Niaga issued these products it initially warehoused the risk internally and then recycled it by offering rupiah interest rate swaps. The bank has also played a key role as a market-maker in rupiah interest rate swaps, helping to develop the market by providing interbank liquidity.

“Since last year we have seen an increase of Jibor-based interest rate swaps,” says Wawolumaya.

The bank has also experienced a major increase in its foreign exchange derivatives business. Since 2015 Bank Indonesia has been increasing the pressure on corporates to hedge out their foreign currency exposure. Last year it went even further by banning non-rupiah forex transactions onshore.

“We saw a 163% increase in forex forward transactions relating to the 2015 legislation and the latest move requiring onshore hedging to be done in rupiah has further driven volumes in 2017,” says Wawolumaya.

The other major innovation in the Indonesian market over the last 12 months has been the decision by the securities regulator, OJK, to allow call-spread trading onshore. CIMB Niaga was in the first group of banks to gain OJK approval, although the market has been sluggish, with corporates wary about using the new instrument. The bank managed to conduct one trade in the first quarter of 2017.