Islamic Products House of the Year: CIMB Islamic

Asia Risk Awards 2011

Jennifer Yong, CIMB

CIMB Islamic’s banking and derivatives franchise continues to go from strength to strength. “CIMB is competitive in terms of pricing, but critical for me is the service. CIMB is speedy in terms of its reply and constantly provides up-to-date information. These are the value-added things that we look for in the sales people and CIMB does deliver,” says Alexis Jong, vice-president at Great Eastern Life in Malaysia.

CIMB’s prominent presence in the global sukuk market is underscored by its role in landmark transactions across the region. For example, CIMB was the joint lead manager and bookrunner of the Trans Thai-Malaysia (Thailand) 600 million ringgit ($190.2 million) sukuk in November 2010, the first sukuk issuance by a Thai entity in Malaysia’s Islamic capital market. It was based on the shariah principle of murabahah – one of the more commonly adopted principles for sukuk – and the underlying commodities were sourced from the crude palm oil (CPO) market. The deal was done on the back of a cross-currency swap to convert the ringgit funds raised to US dollars.

“The cross-currency swap, hedging wise, is not so much an issue but having it being done in an Islamic format when it is of large size tends to get a little bit cumbersome,” says Jennifer Yong, executive vice-president for structured and banking products at CIMB’s investment bank in Kuala Lumpur. “But we have got the economies of scale and operational readiness and efficiency to be able to execute these transactions in a very commercially viable and cost-efficient manner.”

CIMB was also a lead manager in the Islamic Development Bank’s $500 million trust certificates, which marked the first sukuk issuance by a multilateral development bank under the Malaysia International Islamic Financial Centre (MIFC) initiative, which promotes Malaysia as a global hub for Islamic finance. CIMB was also joint lead manager of Khazanah Nasional’s S$1.5 billion trust certificates – the largest sukuk issuance in Singapore and the first Singapore dollar sukuk issuance under the MIFC initiative.

Swap shop

CIMB’s stronghold in Islamic profit rate swaps remains intact: the group had outstanding notional contracts totalling over 6 billion ringgit as of June 30, 2011. It also has an expanding suite of exotic structures including Islamic long-term FX forwards, Islamic cross-currency profit rate swaps and total return swaps.

On the structured investments front, volatile market conditions led CIMB to switch focus during the past year to flow products from the tranche-based products based on specific themes and strategies that were popular prior to the 2008 global financial crisis. “Flow structures provide investors with the flexibility to enter the investment at their own time and allow investors to monitor the structures and rates available,” Yong says.

CIMB Islamic issued more than 300 shariah-compliant structures between the second half of 2010 and the first half of 2011, bringing the proportion of shariah-compliant structured investments to over 50% of the overall CIMB-structured investments issued in Malaysia, with a total issuance size of 1.2 billion ringgit.

A popular flow product was the callable Islamic range accrual (CIRA), which raised over 1 billion ringgit from retail and institutional investors during the year to the end of June 2011. CIRAs, available in tenors of five or seven years with minimum investment of 65,000 ringgit, offer principal protection if held to maturity and are referenced to the six-month Kuala Lumpur interbank offered rate (Klibor). Investors get regular payouts on a quarterly basis if Klibor stays within a range.

Another popular product was the callable Islamic protected profit negotiable instrument of deposit (NID-i), which raised 82 million ringgit. The product pays higher step-up rates than normal fixed deposits with a quarterly callable feature, meaning the bank has the right to call back the structure with 100% principal return to investors together with any profit earned for the period.

The spike in investor risk aversion in February 2011 saw CIMB come up with a solution in the form of a flexi-NID-i, an Islamic principal-protected product issued to retail investors and which raised around 50 million ringgit. The product gave investors the option to switch between a fixed and variable payout, with an average of 5.85% per annum subject to the performance of the reference indexes (the S&P 500, Eurostoxx 50 and HSCEI) once every two years. The investment is based on the shariah concept of restricted mudharabah with profit sharing ratio (investor: 99.9%, bank 0.1%).

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