Overhanging uncertainty over the pace of future interest rate hikes by the US Federal Reserve and a range-bound baht have resulted in a sharp drop in both foreign exchange and one-off derivative transactions in Thailand over the past 12 months as importers and exporters adopted a "wait and see" stance. Against this backdrop, Siam Commercial Bank completed a number of big ticket deals while continuing to meet client requirements amid tougher operating conditions.
The bank has continued to offer alternative hedging instruments to help support client portfolios and has seen more interest in forex options transactions this year compared with previous years, says Thanu Vajrabhaya, financial market sales officer at Siam Commercial Bank. He notes that there has been a big change in how importers and exporters hedge their transactions this year.
"With range-bound movement of the Thai baht from the beginning of this year, a lot of clients would leave their portfolio unhedged and just transact at the spot price. However, we offered options structures to clients to help enhance their buying or selling of rates and this has been quite popular," he says.
To offset the decline in one-off derivative transactions, the bank continued to focus on investment portfolio offerings. SCB says it has seen increased demand for dual currency deposits and principal protected notes that offer a fixed coupon and bonus equity-linked payout. The bank has also had success in its equity derivatives franchise where it has executed three domestic deals and one offshore milestone transaction with Thai corporate clients for a combined value of over 10 billion baht ($290 million).
"For the three domestic transactions, our structuring team helped shareholders to leverage more value out of their existing holdings as quite a number of companies in Thailand are owned by individuals. For example if the shareholder had a 30% or 40% holding, we could effectively utilise that stock into a structure where they could get additional yield through a combination of loans and equity options," says Vajrabhaya.
The final result meant that the shareholder would retain ownership of the company but the stock could be utilised as collateral for additional loans allowing for lower funding for the client. The bank also helped lead a milestone offshore transaction which saw ThaiBev issue around $300 million of warrants on the Singapore Exchange.
"The original deal was initiated by ThaiBev in Thailand and we placed it with the help of our partners on the Singapore Exchange. This was probably the biggest equity derivatives deal done by a Thai bank to date," says Vajrabhaya.
SCB has also enhanced its risk management systems over the year, particularly in the area of credit valuation adjustment (CVA). To reduce CVA volatility, the bank has implemented a vendor solution from Numerix to compute CVA provision and sensitivity on a daily basis. The system also allows for the CVA charge to be calculated upfront before a deal is concluded using a pre-deal function. Under the old system, CVA was calculated on a monthly basis.
Sakda Dumnakkaew, executive vice president of market risk managemen, says SCB is also revising its CVA risk management framework to align with best practice at global banks.
"Under the new CVA framework, a formal CVA desk will be set up under the front office with a key mandate to minimise CVA volatility. The scope of market hedges will be extended to cover forex spot, forex swaps, interest rate swaps, cross-currency swaps and options as the new CVA system is able to provide a variety of sensitivities to underlying market risk factors. This helps SCB to enhance both ex-ante pricing and post-performance measurement of its derivatives business," he says.
The bank has also started a potential future exposure (PFE) project in June 2016 to enhance counterparty credit risk measurement and will look to implement an integrated system to monitor and control internal credit risk limits.
"With this new system, SCB will be able to measure counterparty credit exposures for derivatives more accurately, especially when there are netting agreements and CSA collateral contracts. The PFE project is targeted to be completed by the second quarter of 2017," says Dumnakkaew.