Structured products are helping to lift income at lenders from Deutsche Bank AG to Societe Generale SA as they benefit from fewer competitors and investor demand for higher-yielding securities amid near-zero interest rates.
Societe Generale cited structured products and equity derivatives among the main reasons for the surge in net income at its corporate and investment bank, which almost tripled to 374 million euros ($499 million) in the second quarter from the same period in 2012. The securities contributed to a 55 percent increase in equity sales and trading revenues at Deutsche Bank during the three months from the year earlier period, the Frankfurt-based lender said in a July 30 statement.
Structured note issuers profited after Royal Bank of Scotland Group Plc and Rabobank Groep departed from the business this year, citing increased costs as regulators raise disclosure requirements for issuers. The push by U.S. and European central banks to stimulate growth by suppressing interest rates is also propelling investors toward riskier, higher-yielding securities.
“When Roger Federer retires Rafael Nadal will feel sad to see a great rival go, but he will also win a lot more,” Jean-Eric Pacini, European head of structured equity sales at BNP Paribas SA in London, said in a telephone interview. “That is what it is like in the structured products business now.”
Capital-markets revenues at Paris-based BNP Paribas rose 4.1 percent from a year earlier in the second quarter as its equity-and-advisory sales jumped 23 percent “due in particular to the rise in transaction volumes and the good performance of structured products,” the bank said last week. The increase came as net income at France’s largest bank declined 4.7 percent to 1.76 billion euros from a year earlier.
RBS said in June it will stop issuing structured products for individual investors, citing high capital costs and expenses for the securities. Switzerland’s Basler Kantonalbank also said in June it will issue no more of the securities, saying diminished growth prospects for the business have cut profitability.
Dutch lender Rabobank announced in March it was closing its equity derivatives unit because new regulations for selling structured notes to wealthy individuals involve increased costs. Credit Agricole SA and Macquarie Group Ltd. have also closed all or part of their equity derivatives operations since 2011.
Regulators in the U.S. and Europe are seeking to increase transparency for structured products, which came under scrutiny following the financial crisis for being opaque and overly complex. Rules requiring banks in the European Union to provide concise information outlining the characteristics and risks of the products they sell could be in place by the end of 2014, according to the European Commission.
Issuers that stay in the market will need to become leaner and more efficient as new regulations will probably drive up the cost of operating a structured products business, said Nicolas Traissac, Deutsche Bank’s head of equity derivatives for Europe, the Middle East and Africa.
“There’s an opportunity now to benefit from consolidation, but the scale required to be profitable is getting higher and higher and issuers must streamline their business,” said Traissac.
Proposed regulatory changes “are unlikely to make that business too expensive from a capital or operational perspective,” said Marc El Asmar, the global head of sales in Societe Generale’s cross-asset solutions business, which provides investment and hedging products to clients, including structured products. “Banks that have left the industry have likely done so due to a change in their strategy rather than because the regulatory environment has made it unviable.”
Interest rates held at record lows have created favorable conditions for banks to sell structured products, he said. The bank saw strong demand in the second quarter for structured notes that bet on price moves in two assets, such as interest rate swaps and an equity index.
The notes became more popular among wealthy individuals because they can be sold with higher coupons than notes tied to just one asset, to compensate investors for taking on additional risk, El Asmar said.