Regional House of the Year: DBS

Asia Risk Awards 2016

Andrew Ng, DBS

DBS continues to be the largest bank in South-east Asia by assets. However, notable success in non-traditional markets such as South Korea and India in addition to continued growth in its core markets sees the bank land this year's Regional House of the Year award. The bank is among the highest rated in Asia-Pacific (rated AA– by Standard & Poor's) and this strength has resulted in significant wins across the region, from institutional investors, corporate clients and supranational funds.

DBS has continued to build trust and partnership with its Asian clients, broadening its client base over the past 12 months, particularly among multinational corporations and institutions. Andrew Ng, head of treasury and markets, says this has helped solidify the bank's presence in Asia. To be able to better serve its Asian clients, the Singapore-domiciled bank has sought to bolster two key locations: London and Tokyo. Eight new members of staff have joined the London office, while six people have been hired in Tokyo.

"London has been about extending our trading franchise in Asian products and expanding our sales team to perform co-ordinating and marketing activities in Europe," says Ng. "In Japan, we have focused on setting up a securities firm dedicated to the marketing and selling of security products to institutional clients in Japan."

This year, the biggest driver of business for DBS has been the rise in volatility across currency and rates markets.

"We are seeing an increasing number of events that trigger volatility in the markets. Banks and hedge funds are not warehousing as much risk as they used to, which means there is less liquidity in the market – so any sudden news event leads to a much more exaggerated move in the market than might have been the case previously," says Ng.

Volatility in the markets – largely a reflection of uncertain central bank policy around the world, according to Ng – has sparked a significant increase in the number of currency and rates trades, and DBS has been well positioned to take a good chunk of this business in Asia.

While DBS may not be as large as some of its global competitors, Thio Tse Chong, DBS managing director of treasury and markets in Singapore, says the bank's nimbleness in structuring products for customers in response to changing market conditions is what sets it apart from competitors.

"We are able to provide innovative long-dated or large-sized solutions benefiting both foreign and domestic customers seeking to match liabilities. We can also develop alternative funding solutions for corporate customers to optimise their capital structure and balance sheet," he says.

The bank says it has seen a 25% increase in institutional investor clients, with notable growth from North Asia over the past 12 months as US and European competitors scale back activity. In South Korea, for example, the bank has sold a number of long-dated notes and structured deposits to Korean insurers and other institutional investors.

With Korean interest rates continuing to fall, insurers were faced with duration mismatches for asset and liability management. In addition to this, the Financial Supervisory Service has announced plans to expedite the implementation of IFRS 4 Phase II, where insurance companies' liabilities will be evaluated using current market rates.

Among the products offered to insurance clients, the bank sold a 30-year dual range accrual swap to a local Korean insurer in what was a landmark for the bank due to the tenor of the deal. Alex Kim, head of treasury and market sales for Korea, says that while insurers had previously purchased notes of 10 to 15 years, regulations were now driving insurers to look at longer-dated notes.

"From an insurer's perspective, they have to consider issuer risk when purchasing a long-term note. There is also a large capital charge from a risk-based capital perspective if you purchase it from a lesser-rated bank. DBS has a very good credit rating so from an investor point of view it is almost a risk-free note. Korean investors are very eager to purchase long-term notes and our strong credit rating is definitely an advantage," says Kim.

The bank has also done similar transactions in a structured deposit format, allowing it to issue in Korean won and has also worked with third parties to issue structured notes. This was particularly useful for investors who had credit exposure limits to a particular name and needed to diversify investment sources.

"We use a third party such as a local bank, securities firm or a supranational. They would issue a note and we would provide a structured swap. For the note issuer, they have two choices: they can print a plain vanilla bond or print a structured note. A structured note may offer a saving on funding costs for the issuer and also provides diversification for the end-investor," says Kim.

Since gaining a credit derivatives licence in February 2016, the bank has also closed four credit default swap (CDS) transactions with local securities houses referencing Korean and Chinese names.

"We were able to deliver credit derivatives via a swap to various security firms and they would then print a note and sell it to their end-client. In addition to single-name CDS transactions, we are also looking at callable single/dual range interest rate structures and credit hybrid swaps in the near future," says Kim.

In India, the bank has executed more than 250 derivative deals over the past 12 months with corporate and institutional clients. Despite only being in India since 2004, DBS has made substantial inroads with corporate clients. In one transaction, the bank worked with an Indian automobile manufacturer with significant operations in the UK to hedge around $300 million of a total of $500 million of currency exposure over five years via GBP/USD forwards. While the client already had existing relationships with a number of global banks, DBS was able to bring a new perspective and this resulted in the bank winning a significant portion of the deal, says Arvind Narayanan, head of Indian sales and structuring.

"The parent company had borrowed in US dollars and all the while they thought the risk was only on dollar to rupee. But we spent time with them looking at their global balance sheet and consolidating all subsidiaries, and we found that a lot of revenue was coming from their UK operations hence a lot of revenue was coming in pounds. So the currency mismatch was actually pounds to dollars and not dollars to rupee," he says.

"After we did the first $300 million, more banks heard about the deal and offered a cheaper price. We realised that once it gets into a pricing game it is better for us to exit as the return on equity would not justify the capital usage," he adds.

In Hong Kong, the bank has offered a number of cost-saving structures to corporate clients via cross-currency swaps as a result of increased volatility in the offshore CNH market, following the depreciation of the renminbi in August 2015. Market fears of further depreciation saw the CNH forward swap point climb sharply, hitting a peak in early 2016 while the USD/CNH cross-currency swap pricing to swap CNH to USD was at a considerable discount. At the same time, the onshore CNY bond market offered much lower funding costs to issuers in comparison with the dim sum bond market.

DBS was able to react quickly to market conditions to help clients gain cheaper US dollar funding for offshore projects. In one deal, a client issued a five-year onshore CNY bond at 4%. By entering into a cross-currency swap, the actual US dollar interest rate was three-month Libor, in comparison to the normal loan borrowing rate of three-month Libor plus 3%. This meant the client saved 3% per annum or 15% of the notional over a five-year tenor.

The bank also worked with clients to hedge their sterling exposures following the UK's referendum on European Union membership. In one example, the bank worked with a Hong Kong property investment firm to reduce borrowing costs.

DBS proposed a zero-cost Libor-linked collar to hedge an underlying loan of £60 million ($79 million) over a tenor of five years, saving the client around 70-80 basis points per annum. The client did not have to pay an option premium upfront while the actual interest rate borne by the client was capped within the cap/floor strike range.

"The client had a floating rate loan in sterling from our London branch and wanted to change it to a fixed rate as the underlying investment was a property. If they chose to do a simple interest rate swap, the negative carry of the fixed rate versus the Libor was quite substantial and would eat up the returns of the underlying asset. The zero-cost structure also was appealing as the cost of paying an option premium upfront may also dissuade clients looking to hedge," says Johnson Wong, senior vice president at DBS Hong Kong.

In Singapore, DBS continues to be a leading market-maker for Singapore dollar foreign exchange and cross-currency options and a significant provider of liquidity in the interbank Singapore dollar rates swap market. Treasury sales income from institutional banking clients increased 4% during the second half of 2015 despite a more challenging economic environment.

While market uncertainty has dampened corporate hedging activity, target redemption forwards (TRFs) remained popular with more than 50% of forex options deals done using a TRF structure. Pivot TRFs and strips of trigger forwards were also popular strategies and each registered more than 17% of the total share of options traded with corporates.

The bank has also continued to sign up corporate clients to its online regional electronic forex auto-pricing and auto-dealing platform, DealOnline. The number of corporate subscribers to DealOnline increased almost 30% from the previous year allowing corporate treasurers to trade over 40 currency pairings in spot, forwards, swaps and Asian NDFs across six key Asian markets DBS is present in – Singapore, Hong Kong, China, Taiwan, India and Indonesia.

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