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Best Global risk management house: HSBC |
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Also nominated: Barclays Capital and Deutsche Bank |
Who saw that coming? The bank whose low-risk, emerging market-led approach and solid capital base eased it through the crisis is fast becoming the world’s favourite risk manager. Take a bow HSBC.
The signs were there in Euromoney’s 2011 rates survey, where the bank polled strongly across the board, backing up its longstanding emerging markets rates performance with big rises in sterling and dollar volumes. The big three in rates – Barclays Capital, Deutsche Bank and JPMorgan – is now a big four.
“On any given day, we’re among the largest sterling, dollar and euro market makers, in addition to the majority of the non-core markets,” says Spencer Lake, the bank’s global co-head of markets. “Providing risk management solutions is quite critical to our DNA.” It’s a bold claim, but the stats are starting to stack up. Even if the best days in complex rates structuring are over for many banks, rates revenues from HSBC’s corporate and institutional clients have increased after the crisis. Shareholders ought to be happy too; rates is still a good game to be in for margins, as global head Elie El Hayek told Euromoney in March.
HSBC’s FX franchise has been the other core focus of its risk management strategy. This time, the bank looks serious about its pledge to become a top-three global FX player. In May’s FX survey, it was the fastest mover in the top 10 by market share, with volumes up nearly half. Combine that with a full whack of top client rankings for emerging markets service provision and a brand new e-trading platform, and the picture looks convincing.
Restoring liquidity to moribund markets has won HSBC rewards as a post-crisis risk management strategy – even if the bank has had to leverage its balance sheet strength to do so. Georges Elhedery, co-head of global markets for Middle East and North Africa, says: “You can’t be an EM-led risk management bank without warehousing client risk, given the reduced level of liquidity in certain EM instruments.”
In Europe, too, the bank helped its clients through severe disruption to the constant maturity swap market after Lehman’s demise, making a market in swaps whose popularity rose when exchanging free for floating-rate risk no longer looked so palatable.
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“On any given day, we’re among the largest sterling, dollar and euro market makers, in addition to the majority of the non-core markets” |
The bank’s real strength, though, is combining its broad global presence with close relationships with government bodies, in particular Asian central banks – many of which are already quietly adopting the renminbi as a reserve currency in a dollar risk environment. Good relationships with them matter a lot; the bank has found itself at the head of the queue when it comes to executing central bank flows, above less-scrupulous competitors intent on bending restrictive regulations to their advantage. The bank’s effective second headquarters in Hong Kong, once a cause of strife, now looks like its strongest asset.
As Rahul Badhwar, head of corporate sales for Apac, points out, central banks will always have flows to execute. “When you have that relationship, you can create a two-way market quicker than anybody else,” agrees Lake. What he calls a “significant majority” of the bank’s emerging market risk management operations take place on the South-to-South axis, such as selling high-yielding Brazilian debt products to Asian investors. “We feel we define many of those axes,” Lake says.
The list of product firsts in CNH is impressive: being the first bank to execute an offshore renminbi rate swap, issue a CNH-denominated bond and launch structured CNH deposits is not a bad hit list. Between HSBC and Hang Seng Bank, its majority-owned regional partner, the bank accounts for around 30% of the CNH market, says Lake. It remains the only non-Chinese bank offering CNH bond custody services in the mainland. “The Chinese see us as a very good partner to help globalize their currency,” he says.
Guido Hebert, global head of rates structuring, attributes many of the client-service plaudits to a mentality shift at the bank, following the merger of its structured and vanilla rates teams. “We’ve developed new ways of looking at old risks,” he says. “We’re better than we’ve been historically at creating and financing asset liability management propositions.”
The new approach is starting to bed down and translate into real business. For Badhwar, the proof lies in big new risk management client wins in Asia-Europe M&A deals – and few come bigger than Prudential’s eventually aborted $35.5 billion bid for AIA last year. That the UK insurer chose HSBC for what would have been the largest underwriting in UK corporate history as the go-to bank for South East Asia makes a pretty strong case. Equally impressive is that the firm chose HSBC to execute vast, confidential FX deals of such size and complexity for the accompanying hedging strategies. The fact that the Pru’s plan didn’t come to fruition makes the deal more impressive, given the work that went into successfully unwinding so many structured FX hedges. Spare a thought for the accountants too.
