Derivatives house of the year, Thailand: Krungthai Bank

Asia Risk Awards 2024

Krungthai Bank’s growth in Thailand’s domestic structured products has been impressive, and it continues to grab market share by reacting quickly when macro changes present opportunities. Earlier this year, as the yield curve on government bonds inverted, the Thai bank was able to issue a significant amount of long-dated callable notes up to 13 years – no mean feat in a market where liquidity only stretches to between five and seven years.

Krungthai Bank’s structured notes business is only four years old, set up in 2020 by enlisting the help of Tortrakun Satayaprasert, a veteran product structurer from HSBC. Satayaprasert is Krungthai’s head of structuring and products development.

Over the past four years, Krungthai has grown its market share to become one of the top two issuers of structured notes in the country by volume, equating to a 21% of market share (as of the end of July). This achievement is made all the more remarkable by the fact that the structured notes sector in Thailand is dominated by securities houses.

“The growth in our structured notes business has been the result of tapping different segments of the market,” says Satayaprasert.

One example is principal-protected notes.

“Before we entered the market, the overwhelming majority of structured notes were linked to equity and few were principal-protected,” he says. “The risk-free curve was very low; the credit spread was low. Clients were looking for something that was relatively safe but still had upside potential. Instead of paying the client low-interest coupons, which were not very attractive, we decided to use the interest coupon to buy an option and embed it into the note instead.”

Structured notes business

The first structured note Krungthai issued was linked an index of luxury goods companies, which raised around 700 million baht ($19 million). This was significantly more than expected, says Satayaprasert.

The bank has since issued structured notes linked to a range of other indices, including an all-weather QIS basket and an index of companies involved with artificial intelligence. The bank has also issued structured notes with a range of other underlyings, including foreign exchange, rates and ETFs.

Satayaprasert says that every year the size of issuance increases. Last year, the bank was able to sell 3.5 billion baht ($98 million) in a single tranche.

The bank has also continued to innovate within the structured notes space, too. It’s 13-year Thai baht callable fixed rate note was a groundbreaking achievement. The Thai interest rate market is liquid up to about five, maybe seven, years. The market is somewhat liquid up to 10 years, and beyond 10, it is very illiquid.

“We work with foreign-partner banks to be able to offer these long-tenor trades. We are quite capable of managing the delta of the product, while our partner banks help us with the optionality,” says Satayaprasert.

Krungthai’s prominence as a structured notes issuer has allowed the bank to capitalise on a recent relaxation of Thai rules allowing CLNs to be issued to high-net-worth individuals (HNWIs). Previously, only institutional investors were allowed to invest into CLNs. Krungthai began issuing these structures to HNWIs this year, becoming the first bank in Thailand to do so.

“We started to see an appetite among our HNWIs for CLNs towards the end of last year, which is why we set up the programme,” says Satayaprasert. “So far the size of issuance has been quite small, but this represents a new opportunity in the market – and we believe it will grow.”

Depository receipts

Another area in which Krungthai has shown strong leadership is within the depository receipt (DR) space. The institution is so far still the only bank to have issued DRs in Thailand, and currently accounts for the most DRs issued on the Stock Exchange of Thailand (24 out of 41). The bank is also the only issue offering DR linked to US stocks.

When it comes to issuing DRs, there is a certain disadvantage to being a bank rather than a securities house. Under a securities house licence, firms are allowed to publish research notes and provide direct advice to customers about what stocks they might want to buy – both options that are not available to Krungthai Bank.

On the other hand, banks can tap into cheaper funding, and can often manage things at greater scale than securities houses can. Krungthai has, therefore, successfully leveraged on these advantages to develop strategic partnerships with certain securities houses.

Such foresight has stood the Thai bank in good stead following a change in the tax regime for foreign investment.

Previously investors could avoid profit on foreign investments, providing that the proceeds of such investment were brought back to the country in the following calendar year. Bangkok scrapped this tax exemption at the end of last year, resulting in a significant decline in investors seeking overseas investment.

DRs come with much more attractive tax incentives. Any income from the product is subject to onshore investment tax instead of foreign investment tax. Furthermore, DR are traded on the local stock exchange, which means they are subjected to tax on exchange-traded products: zero capital gains and 10% withholding tax on dividends.

Satayaprasert says Krungthai Bank issued 12 DRs last year, whereas in the first half of 2024 the issuance had already doubled to 24.