The year 2021 was ‘another record year’ for the structured notes business at the treasury division of United Overseas Bank (UOB) as the products delivered a 20% increase in pre-tax income year-on-year (YoY).

Meanwhile, the autocallable-dominated products accounted for nearly one fifth of the total AuM at the treasury division as at December, according to John Lau (pictured), executive director, head of treasury products & specialists at UOB.

“The first quarter of 2021 was the strongest followed by a stable performance in Q2 and Q3. The last quarter slowed down a bit due to tightened safety management measures in Singapore, but we saw a great comeback in November,” Lau recalled.

The asset class diversification will be one of the focus in 2022 - John Lau

The momentum at the start of the year was primarily attributed to the comeback of existing customers whose structured notes may have been converted into equity shares triggered by the market crash back in March 2020, allowing UOB to rebuild its AuM.

“Our portfolio enjoyed very good performance in Q2 when the market started to stabilise and rally driven by the sustainability theme and US financial sectors,” said Lau. “During the second half of the year, we did observe the hit of the Chinese technology sector as a result of regulatory actions, which impacted part of our portfolio velocity.”

He added that Hong Kong-listed tech stocks formed around 20% of the total sales volume of structured notes at UOB in 2021, which was a ‘fair amount’ given the sheer Chinese economy size.

“It took us a while to assist existing customers and build new ones during the downturn,” said Lau. “A small number of investors chose to increase their exposure on the tech names in the downward market, but we usually advocate a more prudential and risk-based approach.”      

In November, UOB pivoted into equity exposures in consumer discretionary, sustainability and more recently, financial institutions across the US, Europe and Asia-ex Japan. US equity underlyings remain the commercial bank’s bread-and-butter as it continues to enhance its portfolio diversification across asset class.

“Additionally, rather than getting into a single Chinese counter, we’ve been trying to focus on market cap indices like CSI 300, which is coupled with payoffs that either have a very deep knock-in or partial principal protection,” said Lau.

While customers are ultimately more driven to household stock names, UOB continues to make efforts in getting them familiar with other options, such as some European semiconductor manufacturers and intellectual property owners.

“This is an area where we've been consciously trying to do educate investors,” said Lau. “Even if the structured notes are converted to the underlying shares, we want to make sure that the investors are happy to hold them for the next few or up to 10 years.

“In contrast, investors may lose everything when they’re obsessed with headline coupons.”

Thematic approach

The healthcare sector remained ‘very popular’ throughout 2021 as the vaccination campaign was being launched worldwide, taking the second place after artificial intelligence (AI) among the five megatrends raised by UOB – the others are US, China and sustainability.

“Because clients are also consumers of banks, it’s quite easy for our advisors to pitch the financial names,” said Lau. “Semiconductors is another favoured theme given the concerns around supply chain crunch in 2021.”

In addition, the 2021 United Nations Climate Change Conference (COP26) held in early November built up hype and expectations on sustainability.  

“We’re trying to ride on the overarching long-term megatrends and come up with new underlying names,” said Lau, adding that the traction of AI as well as its subsectors like cybersecurity was garnered due to the increasing use in people’s daily life and attractive pricing.

Looking ahead

In the first quarter of 2022, UOB is increasing its structured note offerings with 90% to 100% principal protection as the yield curve starts to steepen, although such products still account for a ‘small proportion’ of its portfolio. 

“We expect to see the return of trades with longer tenor or full funding as well as FX-linked structures such as dual currency investments,” said Lau. “The asset class diversification will be one of the focus in 2022.”

Compared with the beginning of 2021, the AuM of ESG-linked structured notes sold by UOB has more than tripled across Singapore, Malaysia, Thailand, China and Indonesia. The bank is working with two investment banks to roll out new green wrappers.

“There were very limited green notes or wrappers in the market when our programme was launched in October 2020,” said Lau. “In partnership with Société Générale, we sought to look at the ESG ratings of equity underlyings with overlays of controversy issues, the trend of such issues and industry peer comparison.”

The eligible universe excludes about 80% of the listed securities based on metrics including financial ratings and liquidity issue sizes.

“The new wrappers will help create different packages of sustainability-linked notes,” said Lau.