They report profits from the segment for past two quarters
Malaysian banks dealing in hedging instruments, particularly that involving foreign exchange (forex), are reporting profits in this area over the past two quarters.
Analysts agree that the business has been growing steadily since early 2007.
While quarterly results do not break down specific earnings from any particular product, the gains in fee income and forex holdings imply that this is the trend going on in most banks, said an analyst.
CIMB Group head of group treasury Lee Kok Kwan told StarBis: "CIMB has taken the opportunity to accelerate the increase in its forex market share in the current environment and has certainly benefited."
As to how much the business has grown, he said CIMB's increase in income from this business was in line with its growth in sales volume and market share.
"However, we would not be in a position to benefit if we had not, since 2005, poured resources and effort into the forex business. Among others, it enabled us to provide a much expanded range of products to better suit the risk management requirements of our customers," he said.
However, not all major banks are seeing higher fee income from forex hedging services.
A spokesman for RHB Capital Bhd said: "We do not agree with the analysts' observation. Our forex income is mainly from the traditional forex spot and forward hedging. There was no significant increase in the forex fee income in the last two (reported) quarters compared to the previous year."
Spot and forward contracts are the traditional hedging tools for forex risk. The newer instruments include options contracts, interest rate options and interest rate swaps.
"We do not think the income from the hedging instruments is sustainable," the spokesman added.
Banking analysts, too, are not certain if the growing income stream is sustainable.
One analyst said: "It is a bit difficult to tell if the earnings will be sustainable, but then again, the forex outlook is volatile so hedging could become popular with clients."
While earnings from this particular segment could go up, the overall fee income is expected to come down this year in line with the weaker capital markets.
Whether or not a bank would see growth in forex hedging would depend on the strategy and outlook of a particular bank's treasury department, he said.
The RHB Capital spokesperson said: "We think the forex market will continue to be volatile at the moment. The traditional spot and forward hedging is still the best way to mitigate the forex risk."
CIMB's Lee said: "The forex revenue stream is relatively stable and depends on volume, market share and level of volatility. It is sustainable because every single export and import transaction has a forex component and Malaysia is the 16th largest trading nation in the world, with the value of its annual exports and imports exceeding its gross domestic product."
He said CIMB planned to expand its operations in Indonesia and Thailand, taking advantage of economies of scale by leveraging on one set of hedging and market-making capabilities, risk infrastructure and systems.
"As CIMB moves towards becoming a South-East Asian universal bank, its forex operations will expand."
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