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Best Global structured products house: Société Générale |
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Also nominated: BNP Paribas, BAML and Morgan Stanley |
This year Euromoney has merged its equity derivatives and credit derivatives awards into an award for structured products. This move reflects the changes in the industry as the walls between the structuring teams in different asset classes come down, as well as those between the distribution teams working with the three main client segments: retail, corporate and institutional.
The winner of this award has not only broken down its own internal silos better than most but also maintains its leading position in what remains the core of the product, equity derivatives.
Société Générale has maintained its leading position in the world of structured products despite keen competition, from its fellow European banks as well as the increasingly active US firms.
According to independent analysis by Oliver Wyman and JPMorgan Cazenove Global Equity Research, SG remains the dominant global player in the structured products business, earning an estimated €3.9 billion in 2010 alone. It has married its leading structured equity products with rapidly growing structured credit and fixed-income products.
It was a tough year for the business in 2010, as revenues fell, competition increased and regulatory scrutiny intensified. Despite this, more and more banks are seeking to play in this congested space. In many ways, it is wrong to judge structured products on a single year. Given their reflexive characteristics, structured products should be viewed as a movie rather than a snapshot. They change over time.
One of the key changes in the past year has been the shift from complex payout structures, so beloved before the crisis, to structures that are more tailored to individual clients’ needs, such as inflation and volatility hedging, or Solvency II-related products for insurers.
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“What clients really appreciate is robustness in tough times” |
Key to making this work is a strong distribution platform and cross-asset structuring capabilities. SG scores highly on both fronts. “We are one of the few banks that are cross-assets for our institutional clients,” says Benjamin Raccat, head of product developments, cross-asset solutions at SG. The business is roughly split three ways between providing solutions for corporate clients, products for institutional investors and products for retail investors. A key metric to analyse the structured products business is the burn rate of clients. If a product blows up on them, they are not likely to return to that provider. SG claims that 80% of its clients were also clients three years ago. That metric demonstrates that a sustainable business should not be sacrificed for easy returns at the point of sale. That is a lesson that some providers will learn from the products that were sold last year.
Another key theme of last year was the growth of the US structured products market, both institutional and retail. On the retail side, this is being largely driven by the need for returns. The firms that have performed well in the US have the widest distribution capacity. But this suggests that when the markets turn, some of the products that have been sold could lose money, although not as much as pre-crisis when complex payouts sometimes led to complete losses. Slow and steady growth by SG in the US gives comfort that such mishaps are less likely than at other firms. “There is no question of complexity in payoffs any more, it is all about offering solutions not just returns,” says Raccat.
Moreover, as regulators in Hong Kong, France, Italy and Belgium all crack down on the distribution of structured products, others are likely to follow suit. Some banks might see that being in the second tier no longer makes sense. This naturally points to consolidation, which always favours those working at the top. SG will be in a leading position to benefit. Structured products are now so central to SG’s DNA that it is unthinkable that it would leave the business. “What clients really appreciate is robustness in tough times,” says Raccat. “Even though there has been an increase in competition, we are still the number one bank in this space.”
The key battleground over the next few years will be providing products that meet the regulatory, tax and yield problems being faced by institutional investors, and in particular insurance companies. SG this year has already established a number of market-leading products to help this client segment in markets across the world. Solutions such as this should mean SG is able to meet its aim of increasing revenues by 20% next year over this year, as other banks fall by the wayside.
