Natixis: focusing on 'edge in engineering' (Part 1)

After a few years of shaky performance following the financial crisis Natixis appointed Luc François in 2012 from Morgan Stanley to head the bank's capital markets division (including fixed income, forex, loans, commodities, equities/cash and derivatives, cash management and management of the Banque Populaire and Caisse d'Epargne-Natixis collateral).

François was charged with aligning the bank's capabilities and establish clear and precise goals for its structured products business. "This goal is to be a key player in the structured products market with less ambitions on the flow side of the business because we think that business has already a number of players with a significant footprint (MS, GS...)," says Eric Le Brusq, global head of equity derivatives sales at Natixis.

Natixis has always been a name associated with the structured products industry but for many years it had the wrong business plan, says Selim Mehrez (pictured), global head of equity derivatives. "The focus was only in the retail business which is the most competitive business," he says. "Sales teams were not doing their job in terms of client pitching, new ideas, how to add value to your client, etc."

Since then, the bank has addressed some internal issues and reshuffled the organisation in every single area including sales, engineering, and trading.

"The key point is that when we joined Natixis [at the beginning of 2014] there was a very good team of people and a clear strategy set up by Luc," says Le Brusq. "If you look at the calibre of the people that have joined us recently you can see that Natixis is still attracting talent from some of our competitors."

The bank's strategy in the structured products market has also changed, says Le Brusq, and the goal now is not being everywhere but occupying "certain spaces".

"One of the elements that has helped us to attract people is our capacity to be innovative and to differentiate ourselves from the competition," he says. "The core engine of Natixis is its financial engineering and our idea-generating capabilities which allows us to bring added value to our products. The feedback we are getting across markets and regions is positive and our capabilities and offering are well regarded."

However, says Le Brusq, Natixis still needs to increase its footprint and catch up on its reach in relation to its competitors. "We are lagging behind some competitors in some key markets but we have a plan to catch up and bridge that distance," he says. "We are fairly optimistic about the outlook and prospects for our structured products business going forward."

EQD ADN
For years Natixis was seen as a house that would be competitive in pricing, and this added a lot of pressure from the sales and trading sides to have a very good ratio "but when you are on a competitive bidding if you have a very high ratio this may reflect that you have the wrong business model," says Mehrez. "When you're in competition with 15-20 other banks if you are winning the bidding three out of ten times there is something wrong in your model."

According to Mehrez, the bank has assessed different pricing models over the last year to find the right models. "We don't want to trade everything," he says. "When our sales are in a competitive bidding the focus has to be in our added value which is our edge in financial engineering."

Therefore, says Mehrez, the bank's sales team does not speak to traders who are focused on booking and monitoring their positions, and the added value comes from the relationship between sales and the bank's financial engineering teams which are led by Le Brusq.

"Financial engineering is on one side and sales are on the other," says Mehrez. "We don't want to have any conflicts of interest. Because of our resources, we are going to focus on those areas where we can make a difference and to tap into networks we have never used before. We want to be a key player in the idea generation side of the process. We have noticed that although we're competing with some key players, 90% of the time we win on the idea rather than the pricing."

Providing innovative ideas doesn't mean providing complex products, explains Mehrez. "We're not interested in pushing our ideas from a black box approach," he says. "We are driving flows in the equity derivatives space and we know that the more ideas we provide the more traction our products will get as they will be seen by investors as an alternative to direct investment."

Business model
In the context of market consolidation and the best set up to be successful in the structured products market, Natixis had to reshape its structured products business and the workforce to streamline the organisation to ensure it could implement its plan consistently.

"We have seen a number of banks changing their business model after Lehman to address the new reality," says Le Brusq. "I think it is key to focus on those areas where you are strong and can provide value as otherwise you are going to be a marginal player. We want to be on particular spots such as the fund derivatives."

Natixis, says Le Brusq, was perceived as a niche player for some time and the plan is to change that perception and bring a consistent strategy that can be applied all the time and is sustainable.

"It's fair to say that in some areas such as the institutional space a cross-asset approach makes sense and in Asia we're organised in a way that we can provide this cross-asset approach which sometimes is to do with scalability," says Le Brusq. "For our French institutional business we have put together a team of fixed income and equity derivatives specialists in one business unit that is supposed to deliver this cross-asset approach to our client base. We put that in place three months ago and we are very pleased with how things are going because it responds to the needs of our clients."

Le Brusq, however, says that it is not a question of having one business model or one way to organising things. "In my view the way you set up your organisation is pretty much linked to the people you have in your teams," he says. "We have bet on a very pragmatic approach. For us it does not make sense to have a cross-asset approach for every single platform and that's why we have a pragmatic and flexible approach and we adapt the business model to the specific needs of a client or a market."

Trading activity
The bank, says Mehrez, is also trying to capitalise on the fall of equity flow volumes to increase its client base. "This has played somehow on our hands as we are now covering clients we weren't covering a year ago," he says. "We have increased our client base by more than 15% and we trade with 50% more new clients than last year."

According to Mehrez, Natixis's lower trading volume in the trading book is also a reflection of the bank's new strategy.

"We don't want to be involved in deals that are going to be costly for us," he says. "From our standpoint we have reduced the volumes but increased the PNL (the daily fluctuation in the value of a portfolio of trades to the root causes of the changes). Our interest is not to execute trades but to work in partnership with our clients and provide them with innovative and value-added ideas for them to reach their goals."

The bank's limits on the Vega, on the Delta, on the correlation, etc., says Mehrez, had to be addressed with the aim of providing "good products not the most competitive pricing in the market".