The redevelopment of Singapore's Marina Bay district seems a fitting backdrop for someone managing the two areas of banking that have undergone the greatest change since the financial crisis. Sitting in his office above one of Southeast Asia's largest construction sites, Bhupinder Singh -- better known to his colleagues as Bhupi -- overlooks a patchwork of trenches and half-built office towers that promise to transform once dormant grasslands into Singapore's new financial district.
In much the same way, banks' institutional sales and structuring platforms have been re-engineered to fit a market environment that is radically different from the predictable, low volatility world of 2003 to 2007.
"The financial crisis has undoubtedly changed the way banks and clients do business," said Singh, who is head of the institutional client group and structuring for Asia ex-Japan at Deutsche Bank. "We have undergone a major recalibration in terms of what our clients want and how we serve them."
Like the army of construction workers toiling in the honeycombs of the districts' skeletal towers, Singh notes that the process of rebuilding banks' sales and structuring businesses is ongoing.
Start with structuring. On the asset side, benign market conditions prior to the crisis saw banks manufacture generic investment products that could exploit almost predictable market conditions. On the liability side, positively trending markets and an abundance of cheap credit saw clients take an incredibly sanguine approach towards risk management.
For corporates, the reluctance to pay for downside protection led to widespread preference for zero-cost risk management products, of which some were unprotected against falling markets. Similarly, with yield being scarce, investors were not interested in eating into their returns to pay for protection against what were seen as unlikely market events.
The financial crisis of course changed all this. Since the summer of 2007, terms such as 'left tail risk' (low probability but potentially significant downside market risks) and 'black swan' (high-impact, hard-to-predict, market events) have became common place. Investors continue to shun complexity in favour of simple, liquid products. Transparency and a clear exit path have become essential elements when structuring new products.
"The way corporations and institutions use structured products has essentially changed. Clients' needs have become much more bespoke, while demand for generic product that could be sold en-masse into low volatility, trending markets has evaporated," Singh said.
This change has been clearly reflected in the way banks direct and allocate resources to their structuring businesses. Leaving aside the staff cutbacks -- particularly in equity structuring -- necessitated by the financial crisis, structuring today has become a far more involved process. Gone are the one-size-fits-all products of the pre-crisis days, with clients demanding in-depth analysis and simpler, more transparent ways to meet their investment or risk management objectives.
"You could say the emphasis for structuring has changed from simple analysis and complex products before the crisis, to complex analysis and simple products today," Singh said.
Responding to this change, Deutsche Bank created an integrated structuring platform called Global Markets Structuring (GMS) in 2009. The idea was to foster closer contact with clients by providing them with a single contact point for structuring across all asset classes. GMS in Asia was the first to move to a consolidated platform, where Singh brought together around 70 people from commodities, credit, equities, FX and rates structuring.
A year in and the response from clients has been extremely positive, said Singh.
"Investors receive a more diversified choice in meeting their investment objectives, while our corporate clients get a more bespoke service encompassing balance sheet, accounting and tax considerations," he said.
One sector where this approach works well is with the region's insurers. Typically focused on providing unit-linked plans -- products that rely on the performance of an underlying portfolio to produce excess returns -- Asian insurers were almost entirely invested in equities prior to the crisis, with little or no protection against market downside. With the events of 2008 delivering a painful lesson in the need for portfolio diversification and effective risk management, policyholders are demanding new products that better protect them against systemic risks over the longer term.
Banks have been quick to meet this demand, especially for products that provide diversified exposure and a degree of principal protection or built-in minimum return. While commonplace in the US and Europe, such products are surprisingly new to insurers in the region.
"Having an integrated team helps us create product to fit this demand as our various structurers are able to work closer together, without some of the competing interests you may have with teams split across different businesses," Singh said.
The push to diversify is also driving interest in products linked to some of the less traditional asset classes, such as foreign exchange and commodities.
Singh said the supply of investable commodities index products available to investors has not been slowed by proposed position limits being discussed by the Chicago Futures Trading Commission. In May, Standard & Poor's became the first to launch a world commodity index comprising futures contracts listed outside the United States. Citi meanwhile has launched a commodities index that gives exposure to consumption trends in the Bric countries (Brazil, Russia, India and China). Deutsche Bank too has been busy marketing its proprietary commodities indices to institutional and retail distributors in the region.
Commodities is also an area where demand for liability management and financing products continues to grow amongst investors and corporations in the region, said Singh.
For example, Asian corporations are becomingly increasingly adept at using simple structuring techniques to turn inventories into a source of working capital. By using unused inventories as collateral, Deutsche's structuring team has been providing relatively cheap short-term credit lines that may otherwise be unavailable to smaller manufacturers who are solely reliant on bank loans.
"This sort of structure was much less relevant in the pre-crisis days, where bank lending was much cheaper and more abundant. However it gives a good example of how the work we do has changed; thinking about the client, their specific needs and what they require, then coming up with an idea that works," Singh said.
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Institutional sales post the crisis -- flow is the new black
'Flow' has become the raison d'être for banks' institutional sales platforms since the onset of the crisis. Referring to all those transactions deemed unfashionably simple in the pre-crisis world -- simple, liquid products such as interest rate swaps, FX options and other vanilla derivatives -- flow has become a major source of revenue for banks globally.
"The focus has gone from low frequency, high-value trades to high frequency, low-value trades. In other words, we are doing more for less, but doing it significantly more often," said Singh.
The switch to flow was certainly beneficial for banks' fixed income businesses during the crisis. With spreads blowing out to extremely wide levels, banks with large flow trading desks reaped the rewards as profitability in other businesses plummeted.
Deutsche Bank's position as being one of the region's flow monsters is well-documented. The bank's local trading presence in 14 markets in Asia ex-Japan puts it in a unique group of competing banks with similar regional fixed-income footprints, such as Citi, HSBC and Standard Chartered.
Even so, Deutsche Bank made a conscious effort to align the regional institutional sales team that Singh leads, known as the institutional client group, towards maximising its flow capabilities. This approach appears to be reaping rewards, with Deutsche's client base in foreign exchange growing by 9% in 2009 and its rates client base up by 10%. In the first quarter this year, the rates client base grew by 20%.
Deutsche Bank is not alone in benefiting from the trend towards flow. First-quarter results show a lopsided contribution from banks' sales and trading businesses, with revenues far outstripping those contributed by investment banking. This trend seems to be growing. Despite spreads tightening, the Financial Times estimated in a May 11 story that the top 14 global investment banks recorded more than $49 billion in revenues from their fixed-income, currencies and commodities businesses in the first quarter of 2010, up from $46 billion in the first quarter of 2009.
Not surprisingly banks in Asia are looking to build their fixed-income and foreign exchange flow businesses, with UBS, Bank of America Merrill Lynch, Standard Chartered and Societe Generale being the most active hirers this year.
Given continued concerns over sovereign credit risk, integrity of the euro and the spike in financial markets volatility in May, it is likely that flow businesses will continue to remain foremost in the minds of banks and their clients.
However, Singh notes that while doing flow well is simple on paper, in reality, it's difficult.
"Having the right technology, close co-ordination between sales, trading and research, access to liquidity and the capacity to internally manage large amounts of risk is not something that can be built overnight," Singh says.
"The key is for sales, research and trading to work seamlessly in transmitting information to the client efficiently and quickly. This requires buy-in from all parties and recognition of this collective effort when appraising people," Singh said.
Along with the focus on flow, sovereign wealth funds, central banks and ultra-high net worth individuals are emerging as key contributors to revenue growth in Asia, with banks jostling to establish themselves amongst each. And when you look at the numbers, it's no surprise why specialist coverage teams are being created to service them.
Largely concentrated in Asia and the Middle East, sovereign wealth funds represent over $3 trillion in assets, according to Deutsche Bank research. Asia's rich are getting richer, with high-net-worth individuals in the Asia Pacific region exceeding the combined wealth of their peer group in Europe for the first time, according to the Merrill Lynch Global Wealth Management/Cap Gemini World Wealth Report. And when you consider 12 of the largest central banks in Asia account for around 70% of the world's currency reserves, it's fair to say the region's growth prospects are fairly reflected in the fortunes of these three client segments.
"Each group has its own unique set of needs and there are certainly differences in scale, however the ability to service these clients effectively will become an increasingly important part of ours and our competitors' focus," Singh said.
Recent hiring activity reflects this. Deutsche recently brought UBS's former head of equity risk management product sales over to head its own retail and private bank sales team, collectively known as global markets investment products, as well as the bank's listed investment product platform, db-x. This follows the appointment of Kenneth Kwok, who joined from Goldman Sachs to cover the region's ultra-high-net-worth clients. Credit Suisse meanwhile hired UBS' former head of equity derivatives, Min Park, and a team of 11 in March last year to bolster its own structured products capabilities.
Plus ça change
The changes to the banking sector post the financial crisis have been wholesale and are set to continue for some time yet. Financial regulation is set to become tighter and profitability will undoubtedly be impacted. In the meantime however, banks are coping with the changes to their clients' demands and the broader whims of the market as a whole. As sentiment swings between uncertainty and optimism in this next stage of the global economic recovery, banks -- always the masters of change -- will need to remain nimble and adept.
