House of the year, Vietnam: Techcombank

This year Techcombank’s competitors introduced cross-asset derivatives structures that combined cross-currency swaps with interest rate hedging on to the Vietnamese market and flaunted their structuring capabilities. But Techcombank had done just that 18 months earlier.

Vietnam’s largest private sector bank launched its currency-linked accrual interest rate swap (Airs) product in May 2017. At the time there was only a limited amount of interest in the product, but its early launch meant that this year the bank has been able to tap into a growing segment of the market: non-bank financial institutions serving offshore lending needs and large corporates that need to guard against currency fluctuations of their loans.

Under Vietnamese law, companies are not allowed to put on cross-currency hedges unless they can show they own the underlying asset. While that suits commodity producers who own the underlying asset and seek to prevent a loss of value when the dong fluctuates, non-bank financial institutions can’t derive the same benefit, as they don’t own the underlying asset.

The Airs product has proved to be useful to such companies and also corporates that cannot access overseas loans and therefore need a way of cheapening the rate of their onshore borrowing. For example, one client found it was paying as much as 8.6% a year for its loan, largely because of high interest rates. By using Airs to strip out the interest rate component, Techcombank was able to shave 1.84 percentage points to bring down the effective borrowing rate to 6.76%.

Being first with this product has helped the bank increase its business flow, particularly in the cross-currency space where trade volumes soared 389% in the space of 12 months. Although the lion’s share of this increase came from a surge in demand among Vietnam’s multinational firms to hedge their overseas loans, the ability to offer risk management products to a broader range of clients – through Airs – also contributed to the increase.

Vu Minh Truong, head of markets division, says the key to being able to offer this kind of product is to have a robust platform that allows sophisticated modelling of the derivatives transactions, and being able to efficiently recycle the risk in the interbank market.

“Over time, we have built a wide range of counterparties where we could offload the risk exposure so that we can gradually reduce our position,” says Truong.

We have seen a significant rise in the number of corporates who want to access offshore loans and swap back into Vietnamese dong

Vu Minh Truong, Techcombank

Techcombank is in a strong position to capitalise on the capital flows, particularly from China, now pouring into Vietnam. Foreign direct investment in the country climbed 69% to $16.75 billion in the first five months of 2019, according to the latest data from Vietnam’s Foreign Investment Agency. Official figures also show offshore loan volumes rose 26% in 2016 and 40% in 2017. Although the data has not yet been released for 2018 – it is usually published with a year’s lag – Truong expects the growth momentum to continue.

“We have seen a significant rise in the number of corporates who want to access offshore loans and swap back into Vietnamese dong,” says Truong. “Many of them are long-term loans, financing for factory construction projects, while the remaining customers are short-term working capital loans.”

When it comes to multinational corporations, many of Techcombank’s clients have hedging needs of significant tenor: up to 10 years or even longer. This creates an immediate problem for clients looking to hedge their currency exposure in Vietnamese dong, since the local forex swap market is only really liquid up to six months, and few banks are willing to commit to hedges much beyond a year. The problem is compounded with an increase in the notional size of hedges that corporate clients want to put on.

This year Techcombank pushed the boundaries in terms of the hedges that it was willing to offer key clients.

Towards the end of 2018, Techcombank executed two cross-currency swaps for two clients. One was a 3.8-year swap with notional value of $277.5 million and the other was a 4.8-year swap with notional value of $400 million.

“In order to offer these big-ticket deals, excellent research capability is extremely crucial to form a clear view of the market and make sure we could come up with a certain timeline to manage the risk exposure,” Truong says. “Additionally, a market insight and a deep-rooted understanding about our counterparties are essential to offload the risk successfully.”

Truong admits the deals represent the larger ones that the bank has offered this year, and says such transactions tend to be few and far between. Nevertheless, the bank has been at the forefront of such deals, he says.

“We look deeply into the market to understand its dynamic and have a clear market view, then we figure out the maximum time of warehousing the risk before deliberately closing down the risk position,” says Truong. “This differentiates us from market rivals.”