House of the Year, Indonesia: CIMB Niaga

Asia Risk awards 2015: Showing market-leading risk warehousing and structured product capabilities, CIMB Niaga retains its crown

This year has seen the return of foreign exchange volatility and Indonesia has been harder hit than most, with a 7% slide leaving the rupiah close to 14,000 to the US dollar – its lowest rate since 1998 during the dark days of the Asian Financial Crisis. In a bid to protect the currency, Bank Indonesia, the country's central bank, expanded its previous policy of compulsory forex hedging to corporates while clarifying that such hedges will be treated as risk management, rather than investment assets.

As a result, CIMB Niaga has seen a notable increase in demand for forex hedging from onshore corporates, and while margins have become compressed by rising competition from global and domestic players, it has managed to maintain market share.

"We are seeing a lot of forex-hedging requirements from corporates this year. This has mostly focused on buying dollars and we have had good traction on the hedging side, compared with the previous year. And, while we have managed to maintain our market share, we are seeing thinner margins than before, mainly because of greater competition from local banks," says John Simon, head of treasury and capital markets at the bank.

CIMB Niaga was granted permission by domestic regulators to warehouse both digital and barrier options in the second half of 2014, and Simon attributes the bank's greater ability to structure and warehouse the risk of exotic derivatives as one reason for its ability to maintain market share.

"Some of the larger corporates transact forwards up to one year, while a few of them do cross-currency swaps out to five years. In fact, we have booked a transaction of this type that was seven years in duration, and have the internal capacity to warehouse this risk out to 10 years," he says.

"This is one of the main plus points for CIMB Niaga, because I believe not many banks are able to warehouse a position of that length."

Simon says the bank is also in discussions with its financial institution clients about ways of using its forex-structuring capabilities, particularly in the area of asset swaps from dollar into rupiah. "Currently, financial institutions are still exploring how to do asset swaps, so we are assisting them to analyse this opportunity."

Given the rupiah's volatility, warehousing cross-currency swaps of a duration as long as 10 years is capital-intensive, but Simon says a move towards collateralisation among Indonesian corporates for hedging transactions has mitigated some of the resulting higher capital exposure.

He says that while discussions about using credit-support annexes have taken place, collateralisation is typically done via a pledge on fixed assets, although CIMB Niaga is exploring whether collateral-support documents could be enforced under local law.

Structured products boost

Last year, CIMB Niaga expanded its local structured products portfolio. The issuance of structured products onshore in Indonesia has been very tightly regulated following major losses from local and global banks operating there.

But CIMB Niaga received permission from Indonesia's financial services authority, Otoritas Jasa Keuangan (OJK), to offer a range of non-rupiah, forex-linked structured products. The additional structures include strike currency, range accruals, and digital and barrier structures.

Towards the end of 2014, OJK authorised CIMB Niaga to reoffer 500 billion rupiah ($35 million) of a rupiah-denominated, callable, fixed-rate structured product that was previously offered in 2009. The regulator also permitted the bank to sell non-rupiah interest-rate collar payoff – a principal-protected structured product.

Network advantage

According to Simon, later approvals from the regulator to sell structured products to retail investors were particularly helpful, given CIMB Niaga's extensive branch network across the archipelago.

"Since December 2014, we have had the licence to sell rupiah-denominated investment products to retail clients and volumes have so far been quite good – the current asset under management is about $60 million in sales since authorisation was granted. I think we are the only bank that offers rupiah-denominated structured products onshore and they are mostly distributed via our network across Indonesia," he says.