Pablo Conde reports on the jockeying and retreat among the major players in the new, post-crisis landscape.
Structured products were the most visible emblem of the 2008 crisis, and investment banks its most public arena. It is not surprising, then, that the industry’s competitive landscape has changed, particularly where the investment banks are concerned. Some players have grown spectacularly in some jurisdictions, while others have stood still or seen their revenues contract as a result of falling credit ratings or the ability to adapt their business model and product mix to the new cross asset class reality. For example, Morgan Stanley’s US market share shot from $2.4bn (6%) in 2009 to $8.4bn (14%) in 2010, while in the Asia-Pacific region Nomura and Daiwa finished 2010 with $5bn (5%) and $4.3bn (4%), respectively, having not been in the top ten at all the previous year.
Most of the banking executives we asked said providers with cross-asset capabilities were winners in 2009, despite the credit rating issue, but the main trend of 2010 was the return of erstwhile competitors and the shift towards a simpler, more transparent, and more liquid market. “In 2010… there was a tougher competitive environment,” as Philippe El-Asmar, newly head of distribution Asia-Pacific, and former head of global investor solutions at Barclays Capital, puts it. Barcap managed to maintain a leading position by adapting as the market was adjusting, he says. “Investors want a transparent two-way flow of liquidity and providers that can offer on-going support to their products.”
While liquidity was one major theme of the recovery, addressing the retail end investor was another. In a trend already underway before the crisis, many investment banks have shifted their focus from hedging to public distribution and as a result have become competitors to their own clients. RBS’s global head of sales for equities and structured retail, Beat von Gunten, says banks are faced with a stark choice. “Either you have a small opportunistic business or you make it global and scalable to justify the maintenance and investment it requires in E-Commerce,” he says. “It is about industrialisation. Given that the fees are shrinking, because of the increased transparency in the OTC markets (which we fully support), an industrialised and streamlined platform and life cycle management is absolutely key to maintaining a leading position.”
Reinhard Bellet, global head of Deutsche Bank’s db-X platform, understandably backs up von Gunten’s thesis, saying only providers with a real commitment to providing liquidity and transparency will be able to succeed: “If you want to create a flow market towards retail you need to be a strong international player who is willing to invest, and not all the players in this market are ready to make that investment before they make money,” he says. “This market is now too mature to just invest some millions and then wait until it pays back…You need to have a clear strategy with a breakdown of investment in IT, IT, IT, marketing, etc.”
Hedging is marginal to Deutsche Bank’s structured products business. “Our focus is going to be on providing a multi-product platform that allows investors unwinding risks… buy and sell volatility…,” says Bellet, “And to do that you need a collateral book with the ability to support the funding.” There are 70,000 products on the German db-X platform, 90% of which needs to be fully automated. Across all products and all jurisdictions, it has over $90bn AUM.
Citi’s head of the cross asset group for the Americas and EMEA, Barbara Mullaney, is another senior executive to have made a significant investment in a global platform in 2010. “In the US we have recently launched our first exchange-traded notes offering,” she says, “And a number of quantitative investment strategies such as Citi Cubes, which allow investors to gain efficient access to commodities.” The bank has realigned its strategy to provide bespoke offerings to several different investor types.
El-Asmar also outlines the success he has achieved by industrialising and minimising issuance costs. “We were able to offer many different products at a low cost in all the regions. Other firms might have been focused on creating payoffs and selling them at a premium to the market,” he says.
El-Asmar says he has witnessed a change in the product offering from long-dated correlated placements to short-dated (one- to five-year) products linked to local indices, single index products with simple payoffs, and that the future will yield more exchange-traded, simpler, shorter-dated, transparent products with secondary market liquidity. Barclays' OTC activity has also decreased during the last two years as a result of its new public distribution focus.
Hedging will always have a role to play in the structured products market, given that many of the high street or asset management distributors cannot hedge their own product. Marc Lemmel, head of equity structured products at HSBC, says this side of the business cannot be ignored, particularly given the importance of HNW and private banking segments, which demand products designed to meet a particular function in a portfolio.
In Europe, JPMorgan too has no plans to build a public distribution platform. “JPMorgan [has] a focus on being a solutions and a platform provider for others,” says David Hansson, who recently moved from Asia to rebuild the bank’s equity derivatives business. (We profile his move in our SRPInterview on p16).
But providers focusing on reverse enquiry business will only run highly concentrated risks and potential losses in their trading books, says von Gunten. “I don’t think that approach is any longer sustainable, since one needs to have a well balanced client revenue franchise between the various client segments in the retail space.”
The general view among platform supporters is that those banks creating retail products with long-term illiquid hedging will not be able to prosper in the current environment, especially when the new regulatory and capital requirements are in place.
Providers’ risk appetite has changed over the last two years and new capital requirements and regulatory constraints have forced providers to look seriously at the business they put on the books: “Every provider is making sure it makes sense to run those risks on the books and people are not looking at today’s value of those dollars,” says Mullaney. “They want to make sure the positions are sound… We are in the business of risk taking, but it is now a much more careful risk taking.”
Not every player is so cautious, however. DB’s Bellet goes so far as to see the arrival of ‘some’ counterparties in some markets as a sign that the market is shifting again from fear to greed: “There is nothing wrong in being competitive,” he says. “But there are other elements to take into account, such as rating, sustainability, market making or reputational risk. [Acting as counterparty rather than distributing your own products] might save you money on marketing, branding and sales support, they can actually invest in having competitive pricing, but we have seen this approach in the past. It only works for a limited amount of time and we have also seen the damage it can cause to the overall market.”
In a well-voiced view of the evils of ‘excessive’ (pricing-based) competition, von Gunten considers it a positive that the new requirements will force even some players to pull out of the retail market. “Not all players will have the knowledge and infrastructure to take this business to the next level,” he concludes.
In the sections below, we take a regional look at the major players. Given bankers’ own focus on the end investor, and since reliable hedging share figures are particularly hard to come by, we rely on a combination of SRP’s issuance figures and market commentary in any discussion of market share.
The US: the boys are back
The most-cited climber in the US market is Barclays Capital, although it actually lost the top spot in 2010. “The last two to three years in the US have seen Barclays coming from nowhere to be top of the league tables on public issuance,” said a banker from a competitor firm. “They have done a very good job for a company that does not have tied distribution. They really took advantage of credit concerns: even the tied distribution houses had to open up to them, because they needed different risks in there.”
In 2009, Barclays had higher overall volumes than in 2008, despite the market having shrunk by 27% from $495bn to $365bn: “Barclays’ credit rating remained strong and there was an overall flight to quality. Many of our competitors were struggling, disrupted or out of the market, and that gave us a big slice of a smaller pie,” says Philippe El-Asmar. In 2009, Barclays was at the top of the market share ranking in the US by issuance and sales, with a 12% share and a notional of €5bn, though by 2010 it had slipped to third (11%; $6.8bn).
US providers with tied distribution performed well in 2010. Bank of America Merrill Lynch retained second position for the second year in a row, increasing its market share and notional from $4.2bn (10%) to $8.1bn (14%).
Morgan Stanley’s distribution partnership with Smith Barney allowed the investment bank to climb to the very top of the issuance table. In 2009, it had a 6% market share ($2.4bn), but by 2010 it had taken 14% of the market ($8.4bn). Pierre Mendelsohn, Morgan Stanley’s global head of retail securitised products, said in a recent interview with SRP that the bank has strengthened its structured products arm and is now pushing to become the leading US provider in Europe, as well as increasing its market share worldwide to 10%.
HSBC, down from $4bn (9%) in 2009 to $3.6bn (6%) in 2010, kept its position in the top ten ranking in the US, but was overtaken by domestic firms JPMorgan ($2.4bn, 6%, in 2009 and $4.3bn, 7%, in 2010) and Goldman Sachs ($2.2bn, 5%, in 2009 and $4bn, 7%, in 2010).
HSBC’s Lemmel says credit rating (Standard & Poors’ AA) was not as much the issue as the need to maintain a consistent level of service on existing products. “All the major players in equity derivatives and structured products were downgraded and most distributors in the main markets would not accept trading with a firm with a rating below AA- or AA. The key was having a competitive set of products,” he says. “During the last year we have seen more competition from domestic providers.”
JPMorgan and Goldman Sachs finished in the top five, having climbed up the rankings by sheer dint of reputation: “They are considered two of the golden issuers in the US,” says an anonymous competitor. However, they have also both been in the spotlight since the beginning of 2009, JPMorgan for announcing cuts of 30% to its structured investments distributor marketing (SIDM) division and letting go senior executives such as global head of structured products for distributor marketing Beat von Gunten, who is now at RBS.
Despite the challenging environment, JPMorgan told SRP it is rebuilding its structured products business in Europe, aided by the recent relocation to London of David Hansson, who heads structured products Europe. Hansson told SRP the market has changed and the business had to be put into perspective: “We had to downsize our standalone business and made some difficult choices, but we’re not out of this market,” he said.
Citi was a clear winner among the US investment banks, returning to the top five in 2010, despite having been out of the top ten in 2009 due to issues with its credit rating. In terms of notional, Citi finished in tenth position in 2010 with $2.1bn (4%). Barbara Mullaney says the bank invested in its distribution platform to regain some ground. “In 2010, we signed up a sizable number of third party distribution partners, including wholesalers, regional broker dealers, family offices and registered independent advisers. These are in addition to our existing distribution through Morgan Stanley Smith Barney, Citi Private Bank, Citi Consumer Bank and Banamex," she says.
Fragmented Europe
In Europe, Barclays and Deutsche Bank dominated the issuance tables, supported by their public distribution networks in the major markets.
“It has played a massive role to have the right delivery mechanism and multiple different vehicles to issue products. Having a variety of wrappers… is as important, or more, for the client than having the ability to offer different types of payouts,” says El-Asmar.
Barclays Capital’s Barx-IS portal has over 2,500 users, he says, and has registered 80,000 secondary market transactions in the course of the last 12 months.
However, the European market is fragmented, with domestic providers dominating their respective jurisdictions.
The rankings did not change from 2009: Intesa San Paolo ($18.9bn; 7%), Vontobel ($18.3bn; 7%), UniCredit ($12.8bn; 5%), Banco Popolare ($12.6bn; 5%), Deutscher Sparkassen- und Giroverband ($9.9bn; 4%), Deutsche Bank ($9.4bn; 4%), Santander ($9.3bn; 4%) and RBS ($8.8bn; 3%) lead the European tables.
Despite huge market losses, a government bailout and being completely out of the rankings in 2009, RBS finished in eighth position in Europe in 2010.
It was able to capitalise on its newly-combined capabilities, says von Gunten, who concedes there are still some issues in terms of recognition after the merger with ABN.
“ABN Amro had a very strong franchise with linear and certificate-type payouts, versus RBS which has a strong expertise in the dynamic underlying space,” he says. “That integration has strengthened the overall business, and we are now building our international presence in the US and Asia. We believe we can grow our business between 10% and 15% globally during the next five years, assuming the market continues to grow and the world economy continues to recover.”
Asia’s Indian summer?
Structured products activity in the Asia-Pacific region had always been fragmented, with a far greater variety of investment cultures and regulatory systems than in Europe or the Americas.
Following the Lehman collapse, this situation changed. The landscape across China, Singapore and Taiwan, as well India and South East Asia, converged for the first time, with a regulatory freeze on structured products that has since been thawing at different rates.
Issuance in Japan and Korea (and to some extent Australasia and Malaysia), which were less exposed to Lehman, was less affected, so that recent Asian volumes tables have been dominated mainly by Japanese banks, which enjoy a much richer and more sophisticated home turf.
The leading provider by issuance and volume was HSBC, which has increased its market share to 11% ($11.8bn) in 2010 from 10% ($9.1bn) in 2009.
Indeed, the 2010 Asian top five market share ranking almost mirrored 2009, headed as it was by HSBC, followed by Mizuho ($6.2bn; 6%) and Nikko Cordial ($6.1bn; 6%).
Asia was always a strong region for private banking products and it is here perhaps that more significant post-crisis changes occurred, says one Asian banker on condition of anonymity.
“Most remarkably, UBS, a very powerful equity house in the structured market for two to three years, was hit severely. They lost their teams to Credit Suisse and other competitors,” he says.
At a retail level, the Swiss bank has not been in the top ten issuance ranking in Asia since 2008, just before the crisis broke, when it had a 3% market share ($4.3bn). In Europe it fared better, but its dominance of the private banking space still slipped. Litigation, especially in the US market, has also damaged the bank’s reputation and several sources pointed out that it did not react quickly enough to the new cross-asset class reality.
Citi’s Harold Kim, head of the bank’s cross asset group for Asia-Pacific, says single dimensional banks that relied mainly on exotic equity flow business suffered a great deal when the financial crisis hit in 08-09.
"Private banks withdrew dramatically from the market, and exotic equity flow largely disappeared, heavily impacting product providers that relied mainly on equity," he says.
"By contrast, we diversified our product set and integrated our group capabilities to become cross asset, so we were able to shift smoothly away from equity products to non-equity structures as client demand changed."
Kim notes that Citi's cross asset capability has resulted in a stronger and more diversified business in Asia, with the equity share of the business dropping from 85% to 45% as a result.
SRP data shows that at a retail level Citi had a 4% market share with $3.2bn in 2009 and 2% share with €1.9bn in 2010. This year, Citi lost its top five position to Japan’s Nomura ($5bn; 5%) and Daiwa ($4.3%; 4%), thanks to a renewed focus on their respective structured products businesses.
HSBC’s head of equity derivative sales Europe, Middle East & Africa, Alain Alev, says the key element in remaining a leading provider is liquidity.
“The last two years have shown that those players that did not provide liquidity to their products suffered and those who were able to provide a consistent level of service over the cycle of the product were winners,” he says.
“Investors were not as interested in new business, but on how you were servicing existing positions, how you were handing the secondary market, the pricing and the liquidity you were providing to your products.”
Deutsche Bank slipped out of Asia’s top ten by issuance in 2010 due to the return to the market of a number of Asian competitors after the 2008-2009 onslaught, and the bank’s increased focus on its fastest growing business, its ETF platform db-X.
According to Bellet, Deutsche Bank has reviewed its approach to the Asia region. “The business in Asia is very fragmented and although we have the ability to offer products directly through our network in some countries such as India, in those countries where you don’t have a network you will have to partner up with local firms,” he says.
“We can’t go head to head with competitors in the US and Asia that have tied distribution retail networks, but we can target different client groups looking for more sophisticated products with less common underlyings, which we can provide thanks to our intellectual property.”
Some of the Japanese banks are looking to cement their leadership in Asia beyond their home turf. Nomura, which boasts the ex-Lehman structured products desks, and Daiwa (which has acquired another one-time regional star), KBC and Mizhuo are all building a presence beyond Japan.
Another latent entrant to the region is Goldman Sachs, which has been recruiting structured products professionals from its Hong Kong office. Without retail distribution these houses will initially focus on private banking business.
Meanwhile, Korea continues to see increased competition from regional players and domestic players as the market continues to grow.
As the ice thaws across China, Bellet also points to growth both there and in India, although the regulatory landscape is still a constraint. However, in both countries it is important to build relationships for the future. Issuers with local distribution are best placed to gain from sunnier regulatory attitudes to structured products.