Structured Products Asia Awards 2016
It's not easy to set up a structured products business, especially when market conditions are sluggish. RHB Banking Group's efforts to build a business from scratch two years ago that now sees healthy structured products sales is the reason it is named Structured Products' Malaysia house of the year.
The team sprung out the creation of the group treasury division in 2014, when the bank reorganised to club together treasury departments from the commercial bank, Islamic bank and investment bank.
It then opted to put the structured products team together in part because it identified opportunities provided by the gradual implementation of Basel III capital requirements across the region.
First, the heavy burden on major international banks has forced them to pull back from various operations in the region, leaving a gap for domestic banks. Second, while lending is capital intensive, fee-based instruments like wealth management products offer a sound growth option for the major banks in the country, according to Lok Kin Seng, head of product innovation, group treasury and global markets at RHB in Kuala Lumpur.
The bank started offering range accrual products from September last year. All were principal-protected investments with an embedded derivatives aspect linked to RHB Bank-approved foreign currency pairs or interest rate indexes. So far the bank has offered six tranches.
In one particularly successful product, RHB sold more than 30 million ringgit ($7.3 million) of a range accrual instrument linked to the Australian dollar/US dollar rate in March. The principal-protected product, which had a one-year maturity, would accrue profit if the spot rate held within a range of 0.72 to 0.75. The product was designed for investors who believed the US Federal Reserve would move the key federal funds rate higher as a countermeasure to the threat of crude oil-led deflation, while the Reserve Bank of Australia would push the cash rate below 2% in the wake of the commodity slump.
Clients were impressed: "I was impressed with product features such as the capital-protected aspects while at the same time being able to participate in higher coupons based on the current market themes," says one Malaysian investor. "As a result, I received the maximum coupon as stated on the term sheet on my investment with RHB. I will definitely continue to do business with them."
The team managed to build the business in a tough economic environment in Malaysia, with economic growth slowing to 5% in 2015, from 6% the previous year. At the same time, the Malaysian ringgit came under assault from a stronger US dollar and weak global commodity demand.
Bursa Malaysia's benchmark FTSE KLCI index of the top 30 companies, dominated by commodity-linked firms like Petronas and Sime Darby, suffered a drop of almost 3.5% over the year. Together with the battering taken by emerging market-linked products, it's left Malaysia's domestic investors with limited options.
But there are always opportunities for those willing to look for them and RHB Banking Group was one bank able to make the most of the conditions - especially for structured deposit products.
"Despite the tough investment environment, we were able to bring in higher structured deposit sales in the first six months of this year compared to the whole of last year," says RHB's Lok.
"We were also able to achieve sales of 50 million ringgit in 2015 and already this year we've already achieved sales of 70 million ringgit," he adds.
The team's ability to tap client needs and stay flexible has played a key role in the boost in volumes, says Lok, as has the close working relationship with the group's private banking arm, which markets and sells the products.
"We have emphasised capital-protected products this year, seeing the risk-averse nature of our clients, while we have a higher engagement with our distributor," he says.
The team is already looking to start providing increasingly innovative products for clients who are searching for higher yield, he adds. This would include structures with only 99% capital guarantees, for example, that will enable the bank to offer higher coupons.
The week on Risk.net, September 8-14, 2018Receive this by email