Regional derivatives house of the year: DBS

Asia Risk Awards 2018

Thio Tse Chong, DBS

The global liquidity squeeze and the impact of rising rates on emerging economies are well-documented. What is less said, though, is the effect on companies with funding requirements.

DBS, with a pan-Asian network, is tapping into that demand by sharing market insights and coming up with innovative ways of financing its cash-hungry customers.

Singapore’s largest bank – with more than 590 treasury and markets specialists spread across the region from India to South Korea – has expanded its rates and currency derivatives business as clients face rising borrowing costs, thanks to a combination of monetary policy tightening, trade tensions and a strengthening US dollar.

“We see a lot of opportunities to manage clients’ liability risk,” says Thio Tse Chong, DBS’s managing director of treasury and markets. “Our ability and capacity to provide good funding solutions is progressively extended to corporate clients, and is gaining traction through education.”

The unwinding of central banks’ extraordinary stimulus has been one of the drivers of current liquidity tightening. The US Federal Reserve has raised rates twice this year, and securities purchasing by the Fed, the European Central Bank and Bank of Japan has dwindled. Together with the repatriation of a part of US non-financial companies’ $2 trillion offshore cash nest, this has led to a reversal in dollar liquidity. That is particularly worrisome for companies based in emerging markets, which saw dollar borrowings climb by one-tenth last year, according to the International Monetary Fund.

DBS’s interest rates hedging and risk management offerings include customised funding products, expanding data-driven usage and deepening relationships with clients, especially with institutional investors and multinational corporations. The changing market environment has also allowed the bank to expand its customer base in its home market and broaden its presence in markets such as Japan, Korea, the United Arab Emirates, UK and US.

With the new approaches, DBS experienced significant volume gains in its rates and foreign exchange products over the past year – forex volumes climbed by one-third and rates business doubled over the past year, says Thio. In addition, the bank’s income from western multinational businesses grew double-digit.

“We continue to demonstrate our strength in rates products and Asian products with a very good combination that helps increase our spans of products and customers,” says Thio. In the institutional segment, DBS has been intermediating for financial institutions, mostly European and US banks, to get into a range of assets such as Asian equities, credit and government bonds using derivatives.

Looking ahead, Thio admits the last quarter of the year could be volatile: “The signs are already there. Quantitative tightening will likely increase to $50 billion on a monthly basis, then there is an increased likelihood in US government debt issuance, the Fed rate rises. A further strengthening of the greenback, along with geopolitical tensions, could jack up market gyrations and crimp the availability of funding.

“We are well-prepared and talking to our clients, demonstrating to them which countries in Asia would have less impact on some of these issues.”

For the past two quarters, the DBS research team has been extremely accurate on the interest rates, cross-currency swap and forex option fronts

James Tan, DBS

One key segment of DBS’s success is the research team’s recommendations. Many DBS executives say the calls were accurate when analysing the market changes, allowing them to provide beneficial information to clients.

“For the past two quarters, the DBS research team has been extremely accurate on the interest rates, cross-currency swap and forex option fronts,” says James Tan, managing director of DBS’s advisory group for both Singaporean companies and western multinational corporations.

The research resources that DBS has put in over the year have been critical under the current market climate, in which not only are interest rates high, but also trade tensions, sanctions and rising risks in emerging markets exacerbate the stress. Clients are relying on DBS to make the right decision at the lowest cost.

“The trading environment is not easy, given the speed and pace of the markets’ twists and turns, and the speed of news that comes up every now and then,” says Thio. “We’re providing a very strong advice-orientated service to the clients, rather than just product-pushing. The clients can always have a good conversation with us about how to address their risks and investments.”

DBS’s Indian clients have, for instance, been beneficiaries. India is already part of the “fragile five” nations – a term coined by Morgan Stanley to describe the group’s vulnerability to capital outflows. Diminishing dollar funding also comes as domestic banks’ lending appetite shrinks amid non-performing loan ratios of about 10%. Add to this a weakening Indian rupee, which fell to a record low against the greenback in September, and the funding challenge becomes Himalayan.

Abhishek Chhawchharia, DBS’s sales head for treasury and markets in India, says the low rates in recent years have led many corporations to look for multi-funding solutions.

In one transaction, for example, a large multinational corporation, which was working on a solar power project, sought a rupee-denominated loan, US dollar trade credit and external commercial borrowing.

Instead of offering the client a single currency loan, DBS split the financing requirements. The external commercial borrowing was structured in rupees for the customer linking to its revenues with swaps written internally by DBS to take care of regulatory requirements and reducing mark-to-market impact for the customer books. Trade credit was financed in US dollars hedged into rupees. The strategy resulted in a much lower borrowing cost for the customer, says Chhawchharia.

The company’s chief financial officer in India was satisfied with DBS’s “very fast turnaround time, very transparent pricing methodology and calculations”. Instead of pushing a traditional product onto the company, DBS came back with a solution within a month, the executive says: “They have set for us a totally new benchmark of what a bank can do.”

In India, the bank provides tailor-made services on risk management, capital raising and investment solutions onshore or offshore to customers that range from multinational corporations to individual consumers.

“We have a mix of home-grown local solutions, and by spending a lot of quality time analysing clients’ balance sheets, we can try and suggest what could be their optimal risk solutions,” says Chhawchharia. “I think the market has come to realise that in India, DBS is a serious player in its treasury market.”

Elsewhere in the region, client demand has been broadly similar. In Indonesia, DBS has noticed more client inquiries on rupiah long-term interest rate hedges from corporates and banks after two hikes by Bank Indonesia. DBS has been involved in transactions worth billions as both a hedge arranger and a hedging bank, including one direct deal that involved eight hedge counterparties.

We have a mix of home-grown local solutions, and by spending a lot of quality time analysing clients’ balance sheets, we can try and suggest what could be their optimal risk solutions. I think the market has come to realise that in India, DBS is a serious player in its treasury market

Abhishek Chhawchharia, DBS

An Indonesian energy company praised DBS’s comprehensive insights on the market, which have successfully helped it hedge transactions that were affected by the increasing fibre prices in the country.

In Singapore, DBS continues to be the leading market-maker for forex and cross-currency options. With one of the biggest forex and derivatives teams in the country, it has been able to offer superior pricing capabilities to customers. Particularly in the second half of this year, DBS has found increased demand for its derivative products and expanded structured securitised financing solutions, driven by growing interest rate hedging flows in the country.

In China, DBS has been providing its equity-linked structured products to clients, so they could be exposed to overseas market investment opportunities while securing their wealth and risks.

For example, DBS regularly reviews the list of underlyings to balance the portfolio mix between Hong Kong and the US stock markets, based on the client’s risk appetite and preferences. It stands out from competitors because it also has A-share index-related structured investment products, allowing clients to participate in bullish or bearish structures.

Outside of Asia, DBS says it is consistently highlighted as a go-to Asia specialist bank from European institutional investors for its Asia business, including forex, fixed income credit and rates markets. Investors tend to favour counterparty banks such as DBS, which can provide insights into the relevant markets in which they invest.

DBS continues to invest in digital innovation to support its clients and update its digital platform to cater to corporate advisory and financial institution teams. The platform provides customers with multi-asset execution and services, with pre-trade checks and post-trade workflows.

It also has been transforming itself into a data-driven organisation by maximising value from data when it comes to making decisions, facilitating solutions and addressing structural challenges. It has rolled out a bank-wide data and analytics program that seeks to embed data and analytics in all business units.

After several years of collecting data, it has developed a central database of line-by-line fund inflows and outflows from all sources within the bank. It is now embarking on the next step in analysing and predicting behavioural patterns in the data to facilitate more forward-looking funding or cash deployment decisions in future.

The bank is also digging deeper into clients’ forex transactions on its cash management platform, taking advantage of their data usage so the bank can better target marketing to these clients.