Derivatives house of the year, Malaysia: CIMB

Asia Risk Awards 2024

Chu Kok Wei, CIMB

The past 18 months or so have seen seesawing market conditions in Malaysia, with implied volatilities spiking in the second half of last year, before falling to more benign levels this year. CIMB’s ability to follow market sentiment closely and rapidly adjust its product offering as client needs evolved has allowed the Malaysian bank to shine this year.

In 2023, CIMB managed to grow its net profit by 28.3% year on year, to reach 6.9 billion ringgit ($1.61 million). This translates to a return on equity (ROE) of 10.7%, compared with the reported ROE of 9% in 2022.

Such profits were turbo-charged by last year’s volatile market conditions. With some semblance of calm returning to markets this year, CIMB had to find other ways of delivering value to clients thanks to new trading ideas and innovative product structures.

“As market conditions have evolved, CIMB has continued to stay at the forefront of innovation and excellence in providing the full suite of market asset class hedging and financial solutions, consistently delivering value and customised strategies for our clientele,” says Chu Kok Wei, chief executive officer of group wholesale banking at CIMB.

New ideas and innovations

Staying close to its clients has helped CIMB to bring new trading ideas and structures to the market just as they were needed.

As US interest rates have moved higher, CIMB has observed increased demand for products to reduce cross-currency funding costs, especially from high-net-worth (HNW) clients. A popular way of doing this is to sell a put option on an existing loan currency and a call option on the desired loan currency.

“A lot of HNW investors have been leveraging on their fixed-income investments. Given the rising costs of leverage, many investors are able to adopt FX options as a more efficient strategy to neutralise the negative carry rather than unwind the trade altogether,” Wei says.

CIMB spotted this trend early and decided to offer additional value to clients, introducing a credit facility to sit alongside the plain-vanilla options strategy. This helps reduce the amount of capital that clients need to set aside for the trade.

The addition of the credit facility set CIMB apart from its competitors. As a result, 37% of foreign exchange revenue earned by CIMB’s private banking division came from this trade.

Another popular product this year has been a capped floater product linked to the USD Secured Overnight Financing Rate (Sofr).

This particular product appeals to the growing number of clients who have adopted the view that the US is at the end of its monetary tightening cycle, since clients forego any potential upside from an increase in Sofr beyond the strike rate.

“The origination of this trade was timely and opportunistic. With yields falling off the cliff recently, the pricing of the structure would not be as attractive now as it was back then,” says Wei.

CIMB has also been building on the successful launch of its sustainability-linked treasury programme in December 2022 by offering sharia-compliant variations of these transactions.

“This marries the clients’ sustainability aspirations with their existing day-to-day Islamic transactional flow and reflects our insatiable appetite to offer differentiated and innovative product offerings to our clients,” says Wei. “This initiative brings us one step closer to achieving our own sustainable finance targets and commitment to promoting positive long-term impact.”

Client commitment

Even in those areas where no new product structures or innovations have been brought to market, CIMB’s continuous engagement with clients has been crucial in helping them navigate some fairly choppy waters.

The collapse of Credit Suisse in March 2023 resulted in significant volatility of European credit spreads on single names, particularly those connected to the financial sector.

This mattered to CIMB, since the majority of the Malaysian bank’s credit issuances reference European banks at the subordinated level. Demand for single-name credit-linked notes (CLNs), which had hitherto offered fairly decent returns for clients, suddenly dried up.

However, proactive client engagement allowed CIMB to benefit as confidence returned to the market and investors, once again, sought out European names. CIMB’s line of quanto CLN products has been proving particularly popular recently, satisfying investors’ need for return as yields in Malaysian fixed income have tumbled.

“Our advanced warehousing capabilities have allowed us to offer a quanto version of CLN that we believe our competitors cannot match,” Wei says.

Unlike other similar products on the market, CIMB’s quanto structure provides a fixed coupon throughout the tenor of the investment (typically two to five years), regardless of a credit event taking place.

“This provides investors a degree of certainty and allows them to plan for a guaranteed cash flow from the bank,” says Wei.

Wei says CIMB’s success in the Malaysian market this year has been all about staying close to clients and being able to respond rapidly to changing needs.

“A lot of the conversation involved updating investors about what’s been happening and re-emphasising the key product features of our products, rebuilding investors’ confidence and sentiment on fixed-income solutions as opposed to just pushing out the offerings to generate sales. This has given us a competitive edge in the market,” Wei says.