House of the year, China: China Minsheng Bank

Asia Risk Awards 2019

Yang Yue, CMBC

China Minsheng Bank (CMBC) is named China house of the year for its ability to differentiate itself from its competitors through enhanced trading and research capabilities that have not only met the needs of onshore clients but also helped some of their smaller peers develop their own structured products businesses.

To a large extent, CMBC had no choice. It enjoyed healthy growth in the first nine months of 2018, as a regulatory crackdown on shadow-banking products saw China’s structured products market grow by an astonishing 65%. However in the latter part of the year, volumes started to level off as the impact of the US trade war started to bite and authorities began hesitating over their commitment to the shadow-banking crackdown.

While structured deposits – combining a traditional savings account with a derivatives investment – grew by 2.2 trillion yuan ($311.5 billion) between January and September 2018, they only grew by 40 billion yuan ($5.6 billion) in the intervening months until June 2019. This has limited the ability of structured products houses wanting to grow their business.

“The market has calmed down from the explosive growth of structured deposits last year,” says Chongfeng Ran, head of structuring with the financial market department at CMBC. “We are seeing banks focus on product quality and attractiveness to the clients and try to build their brands’ recognitions via this type of product.”

CMBC, one of the largest privately-owned commercial banks in the country, entered the structured deposit space as early as 2014. Its flagship index – the Minsheng Bank Smart Transglobal Asset Rotation (MStar) index – has continued to innovate and evolve with the launch of two new index-linked products over the past 12 months.

One was a beta-only strategy called MStar-Global index, which uses a rules-based systematic approach to underweight or overweight assets based on the past three months of performance and a volatility target to limit market movements. This index also added Chinese stocks and bonds futures to the original MStar index, which had previously only exposed investors to the US, Japan and Germany.

The other index, MStar-Plus, consists of two smart beta strategies combined with three alpha strategies. The beta strategies include European and American value momentum sector-rotation strategies, while the alpha strategies include a commodity curve and liquidity arbitrage strategy, an interest rate trend-momentum strategy and a stock-implied volatility carry strategy.

Assets under management linked to MStar now stand at five billion yuan ($700 million).

MStar-Global index achieved an absolute return of 6.6% for the first four months of 2019, thanks largely to the outstanding performance of China’s equity and bond market: the benchmark CSI 300 index, consisting of China’s 300 most liquid stocks, was up by 28% in the first quarter.

“The Chinese market is less correlated with the developed market, enabling onshore clients to participate in global asset allocation while receiving stable returns,” says Ran. “As the Chinese market gradually opens to foreign investors, the market will become more mature and suitable for passive investment.”

The bank has benefited from its diversified client base ranging from retail customers to corporate and private banking. Its first structured product linked to the MStar index in June 2018 yielded a 5.8% return at maturity, higher than the averaged 4% return rate among other structured deposit products in the market, according to Ran.

As CMBC becomes one of the top market leaders in the structured deposits space in China, it has also begun to work with smaller banks in the country, which receive retail deposits and help finance small and medium-sized firms.

“We have a bigger business flow coming from our peers in banking,” says Ran. “The city and rural commercial banks in China are also trying to develop its own indices but sometimes in vain due to their limited resources. We are able to help and export our expertise to them.”

Ran says banks in future may be more willing to develop their home-branded indexes in order to develop their business and own client basis. ICBC and Citic launched their own index-linked structured deposit products a few months ago. With mounting competition, CMBC plans to keep its quest for innovation and self-improvement going.

Previously, CMBC hedged positions by executing back-to-back trades with global investment banks and onshore security houses, but this year started to hedge the market risk of its structured deposit products through its own proprietary trading desk.

“The trading desk benefits from client-based flows and an improved market position,” says Ran. “The product, on the other hand, benefits from a more cost-efficient hedging and zero credit risks exposure.”

This win-win situation is made possible because of an in-house system that allows CMBC to aggregate the risks associated with movements in derivatives positions and dispatch specific trades to different trading desks where they are needed.

Another system upgrade this year is the increased connectivity between the bank’s head office and the local branches in its structured deposits management system. The approval process is now automated, saving a lot of time and efforts for its bankers.

“CMBC is actively transforming our financial market business from proprietary trading to client based business,” says Yang Yue, president of finance market department at CMBC.

“We have established leading infrastructure and designed a package of products solutions, which can effectively meet our clients’ investing, financing, hedging and wealth management demands. The series of structured deposits products linked to MStar Index is one of the innovative wealth management products we offered to our clients [and has helped them] achieve competitive returns in the past year.”