Mexico: BBVA’s structured note issuance hit by rate fluctuations

According to Pablo Parra (pictured), BBVA Bancomer’s head of global structured solutions, the bank saw the issuance amount for rates-linked products halved compared to the previous quarter.

“Here, a flat Mexican curve with low volatility is certainly not helping,” he said. “We have FX, where these structured notes showed an increment for USD-indexed products, showing that clients were more concerned about the USD/MXN performance towards the end of the year.

Clients are still concerned about the potential Covid impact in the Mexican economy

The bank has also detected distinctive behaviours across different underlyings with equities emerging as a winner.

“We saw an increase especially in autocallable products,” said Parra. “In equity, we saw a very significant increase in the number of issues (>170%) and amount placed (>350%, due to the high rotation of the products issued).”

A general trend in the Mexican structured products market is that clients continue to opt for shortened maturities. “Here, the flatness of the curve is again not helping to push investors to longer maturities,” said Parra.

According to SRP data, BBVA as an issuer group ranks as the second most prolific throughout the Mexican structured products market with 431 products worth MXN 17.1 billion (US$841m).

This can be compared with the bank’s Q4 19 issuance of 396 products valued at MXN 24.8 billion. The bank’s sales volumes continued to fall and reached its lowest level during the second quarter of 2020 with an issuance of 423 products valued at MXN 16.8 billion.

The bank’s Q3 20 issuance of 506 products (MXN 19.2 billion) was the highest throughout 2020 though it suffered in the following quarter.

The top issuer group in Mexico during Q4 20 was Monex with an issuance of 960 products valued at MXN 46 billion. After BBVA comes Santander with 27 products worth MXN 912m, Citi with 20 products valued at MXN 698m, and Scotiabank with just one product worth MXN 63.8m.

BBVA Bancomer has 723 live structured products listed in the Mexican market with an estimated value of US$2 billion. Top underlyings include the TIIE 28 index, the USD/MXN currency pair as well as individual stocks such as Amazon, Netflix, NVIDIA, and Wynn Resorts.

Earnings report

BBVA Bancomer’s net income for the quarter totalled MXN 12.9 billion, representing a 40.1% decrease from the same period a year prior.

Net income for FY2020 equals MXN 36.2 billion reflecting a 26.6% loss from 2019.

Derivatives stood at MXN 223 billion as of December 2020, compared to MXN 136 billion recorded in December 2019.

A green shoot came from trading income which went up by 30.1% in FY2020, driven by the increased activity in the Global Markets segment, coupled with the constant placement of foreign currency operations and a positive performance of the securities portfolio.

The bank expects the USD-indexed products to continue growing throughout 2021.

“Even though we have seen the MXN strengthen lately, clients are still concerned about the potential Covid impact in the Mexican economy and particularly in the Mexican peso for the rest of the year,” said Parra, adding that investors are showing more of an interest to diversify and branch into other geographies/sectors as well as underlyings in their structured product portfolio.

“With these conditions, we expect the issuance of structured products with a higher capital protection, which would certainly help the performance in case there is a significant correction in the market.”

Anti-cyclical products are also expected to gain traction as a hedging instrument of equity portfolios.

“In equity in particular, with the S&P500 at maximum historic levels, we see the volatility levels going down, but they are still higher than pre-Covid, which still offers interesting opportunities,” said Parra.

Click here to view the Q4 20 earnings.