House of the year, Thailand: Siam Commercial Bank

Asia Risk Awards 2017

Asian currencies have risen across the board against the dollar in 2017 and the baht was no exception, reaching a 27-month high of 33.1 against the US dollar in July – a move that prompted the Bank of Thailand to warn that it was prepared to take actions against speculators. The central bank was particularly nervous because of the kingdom’s large export sector, which suffers when the baht strengthens; Thailand sends 25% more goods abroad annually than Indonesia, an economy three times its size.

For Siam Commercial Bank, this macro-trend presented an opportunity to broaden the lender’s corporate foreign exchange options business to include small and medium-sized firms, a move that has received backing from a central bank concerned about a lack of risk management activity by this sector.

“Foreign exchange risk is a sensitive subject in Thailand,” says Teerapol Rattakul, head of financial market division at the bank. “The baht moved 7% in 2017 – which to me isn’t huge, but Thailand has a lot of exporters that are used to 1% or 2% moves and they got concerned.”

In order to educate the market, SCB put on a series of seminars and roadshows targeting smaller firms that may be unfamiliar with forex options. And the team also had to convince senior management that Thailand’s smaller firms were able to manage option strategies.

“The bank has traditionally been quite reserved in terms of allowing smaller corporates to do forex options as there was concern around reputational risk if the product were mis-sold. But we have changed the mindset of people internally. It’s not a product that you need to be afraid of as long as it is sold properly.”

The results so far have been pleasing, with Rattakul estimating the bank has doubled its corporate forex options book in the last 12 months. In fact, selling forex-based structured products has been one of the biggest drivers of new business for the bank’s derivatives team.

Unsurprisingly for a commercial bank with the second-largest amount of assets under management in Thailand – after Bangkok Bank – SCB has a large portfolio of Thai high-net-worth clients.  Until this year, however, it had only sold these clients basic retail banking products such as credit cards or mutual funds, but Rattakul says the decision was made to sell them more complex value-added products. 

SCB opted to kick things off by marketing dual-currency notes, which might be a relatively vanilla product in Hong Kong or Singapore but are innovative in the nascent Thai structured product markets, says Rattakul. Again, this move came with tacit official support, with the Bank of Thailand looking to encourage more Thais to invest overseas.

“We are the first local bank to try and do this in a big way. The numbers started off very small last year, but it is gaining traction. The international banks have tried to sell these structures onshore in Thailand before but because of their small size [in the domestic market] and limited coverage, they have been unable to build meaningful volumes,” says Rattakul.

The combination of focusing on the corporate forex business and dual currency notes has driven an upsurge in SCB’s over-the-counter options volumes and number of deals by 231% and 314% respectively. SCB also sold non forex-linked notes to its high-net-worth client base. So far clients have been very enthusiastic about the product offering.

“It’s been a good year to start selling these products – most people who bought equity or index-linked products in the last year have been laughing as everything has gone up,” says Rattakul.

He adds that this is only the first stage in building a structured product business. In June 2017, SCB expanded its existing Murex platform to include managing forex options – previously it was only used for fixed income and interest rate-linked derivatives products.

By enhancing its derivatives risk management platform in this way SCB is now capable of managing a number of path-dependent and exotic forex options in-house, from the front to the back office. This is a direct contrast to the previous approach of simply offloading all the risk via back-to-back deals with global banks.

“Expanding our corporate forex and high-net-worth business means we needed to put a more sophisticated platform in place to manage the risk instead of just laying it off. We are in the process of validating the models and gaining central bank approval and once this is done we will start offering second-generation exotics like range accruals,” says Rattakul.