Bank of the year, Thailand: CIMB Thai Bank

Asia Risk Awards 2020

The environment faced by investors and corporates in Thailand over the past 12 months has tested CIMB’s abilities on several fronts. The tension of trade battles between China and the US set the tone for 2019, while 2020 has been marred by a combination of market volatility and Covid-19 countermeasures, which translated into a weakening of economies and business conditions more generally.

“Liquidity was my biggest concern during the crisis, but now it would be credit as that is the most uncertain aspect,” says Pao Chatakanonta, deputy treasurer and head of markets. “Credit [quality] is now harder to gauge. Having said that, we have a very strong team behind us who generate insights into each company, to tell if it would do well at least three to six months in advance. The last thing I rely on is [an external] credit-rating agency.”

That self-reliant streak is a theme that characterises CIMB’s activity, through its development of strong, specialist teams connected via a centralised risk function and an active management team.

Consequently, CIMB Thailand has come through for a broad range of customers across the corporate, investment and banking spectrum.

Starting in 2019, the bank was dealing with Thailand’s expected persistent low rate environment amid tougher economic conditions, a global flattening of the rate curve, limited local equity volatility and tightening credit spreads within Asia.

When Covid-19 struck, CIMB saw what it describes as “a natural response” from corporates to hoard cash and to exercise any standing credit facility from banks.

Credit [quality] is now harder to gauge. Having said that, we have a very strong team behind us who generate insights into each company, to tell if it would do well at least three to six months in advance

Pao Chatakanonta, CIMB

“We did see a business slowdown in their hedging requirements – although [the corporates’] results are not bad,” says Sarinthon Suree, head of treasury sales. “On the other hand, in the fixed-income space we saw asset managers who had to sell down a lot of assets, which we were able to buy and then sell to our distribution side.”

However, a caveat to the latter point was an increased development of private closed-ended funds in the asset management space, which reduces the impact of a market sell-off.

“The result is that they might hold a 4% bond that gives a better rate over the central bank rate and no-one can force them to sell it. That has created a new landscape,” explains Chatakanonta.

Interest rate levels created a range of problems for different types of clients, although the interest rate spike that occurred during the sell-off in mid-March – when the five-year Thai baht interest rate swap moved from 0.5% to 1.3% in a week – allowed the bank to issue its Step Up Range Callable Range Accrual Debenture. Most of these were set with a five-year tenor and callable by the issuer.

“We were able to swiftly hedge and distribute the product in a very thin market,” said Bhudinan Sethanandha, head of structuring and distribution.

The product offers investors a high coupon where short term rates stay within a specified range, tailored according to investor needs. Financial firms were able to use asset swaps for hedging and investment purposes, with CIMB sourcing overseas bonds and engaging in cross-currency hedging. More than $2 billion in notional was traded during the awards period.

Having been an early mover in developing products for the credit space over the past five years, the bank issued its first US dollar-denominated credit-linked debentures with two trades of $20 million each, with three-year USD credit-linked notes referencing the Bank of China and China Development Bank.

The local mutual fund customer received an effective yield of around 2.2%, providing a better yield for the fund than might otherwise have been achieved thanks to the cross-currency swap hedge that converting the currency to Thai baht at an attractive rate. Other client sectors needed different solutions.

“On the corporate side, pre-Covid we were mostly offering hedging, cost saving and structured loans to them, but the landscape has changed. At the moment, [clients] are hoarding cash and drawing committed credit lines, using those for the short term rather than investment. That is an opportunity for us,” says Suree.

With the reversal of global interest rates, the bank issued notes linked to a diversified set of global fixed-income funds to both corporates and high-net-worth individuals worth six billion baht ($193 million). Corporate customers have also seen 220 million baht ($7 million) of dual-currency structured debentures executed. The favoured currency pairs for this execution are the Thai baht and the Japanese yen.

Uncertainty in the equity markets has dampened investment appetite for baskets of cash instruments, with some assets ahead of themselves and others trading at a discount.

“That is an opportunity for us to develop structured products. For example, it might not make sense to buy bank stocks because earnings are uncertain, but equity derivatives make sense,” says Sethanandha.

The sophistication of the products on offer, including Knock-In Knock-Out equity-linked notes, speaks to the capacity of the bank to handle risk as much as it can cater for client demand. 

“Right now the majority of products we underwrite are in the rates and FX spaces, but as a solution provider to our clients if they have a need we have to be the supporting party for them,” says Somchai Yongkrittaya, head of market risk management. “We build a working team from different units, including risk, operations and the client-facing side to make sure that what we are doing is allowed by the regulator. The second thing is to ensure we can evaluate the product’s risk measures and to assess how we can manage that risk.”