How has your year been so far?
The year has gone very nicely for us so far. All the restructuring we put in place last year has meant this year has been all about growth. This is a nice position to be in compared to the rest of the market. We have had the luxury of declaring restructuring over and so 95% of our effort has been to get out there and move on. We are now running a return on equity (ROE) in the last two quarters of 28%-29%. We have grown client revenues year on year by about 23%. The fourth quarter looks like continuing that trend.
Why are you doing so well when the rest of the market is doing so badly?
Many banks talk about focusing on the right clients and right products but the difficulty with that lies in the execution. But we have religiously seen that process through and had the difficult conversations with clients last year. We have lowered the traditional balance sheet from the selected client base while increasing the cross product penetration. Clients have met us halfway in this exercise and so the lift in ROE is a combination of less capital on the balance sheet and the clients following through by using more of our products.
How have your local debt market franchises developed?
We chose to concentrate on Singapore, Hong Kong and Korea at the beginning of the year. We have put the relevant structures and licenses in place in each of those markets and have staffed up by around 25 people. Before we had the licenses in each of these countries, we went round to our top 20 clients and asked if they would issue and they have. So by the end of September, for example, we were the number two bank in Singapore dollar bond issuance for foreign issuers. The challenge in local currency securities is that plain vanilla issuance, without a swap attached, does not make money. So we are looking for names that are coming to the market and intend to swap. We do not want to play in the beauty parades for the next plain vanilla bond issue.
Given the low interest rates and the low fees brought about by the competition, how do banks make money in this environment?
There are two points to making money. Firstly it is housekeeping. We are making good money today because we are not carrying the baggage that others are carrying. Our cost base is much smaller and so it is easier to make money if, on Monday morning when we come into work, our costs are 30%-40% lower than our competitors.
On the revenue side we are making money because of the spread in the revenue base. Our annuity type commercial banking revenue, while affected by lower interest rates on the one hand is helped on its funding side. Our clients are also now talking to us about getting higher yields, so our swaps ability becomes an enhanced investment instrument. So we are being nimble enough to say that our derivatives engine is now being used to help clients in a low interest rate environment.
We have a number of proprietary businesses - such as a global exchange arbitrage desk based in Korea - which have done very well this year given the volatility. We have also made use of the low interest rate environment to encourage some names to come to the market now and do some debt capital raising.
What product development have you gone after this year?
Distressed debt was always a small part of our business but now we have got the green light to expand that significantly, especially in Korea and Taiwan. One of our biggest skills is risk analysis and so we will leverage off that. We have been expanding our global exchange arbitrage desk in Korea (its based there because the Korean market has the most liquidity in cash and derivative equity markets in non-Japan Asia). Our commodity trading business has also had a very good year as clients seek to hedge out the uncertainties coming from the Middle East.
What is your current client split between issuers and investors?
Three years ago it was 90% issuers. Now it is approaching 40% investors. We have deliberately focused on the investor side. Central banks used to just manage reserves, put them away and not worry about them. Now they are asset managers. There has been a huge shift by the asset managers, including central banks, of actually going out and hiring market practitioners. That has changed the interface. There is a new sophistication among these big money managers.
There is also a willingness to get approvals to go into instruments they have not traditionally been in. So the spread of products they want to see is much broader. And the absolute liquidity in Asia is absolutely awesome. One of the fastest growing businesses we have in Asia is distribution of US fixed income products. It has always been there but was quite modest. Yet, in the last year the percentage of issuance we do in the US that gets tucked away in Asia has risen significantly ? probably about 15%-20% over the past year.
What are these investors looking for when buying product from you?
Capital protection will always be the first part. But more and more they are eking out a growing percentage of their books that they are willing to go long with. They are getting into instruments such as asset-backed securities (ABS) and mortgage-backed securities (MBS) that they would not have touched two year ago. So now there is a steady flow of reverse enquiries coming out of Asia and seeking out sophisticated and diverse ABS deals.