Natixis: There is a lot of room on the payoff side to address investors' needs (Part 2)
In the second part of a profile on Natixis, Eric Le Brusq, the bank's global head of equity derivatives sales and Selim Mehrez, global head of equity derivatives, spoke to SRP about adding value to structured products, the bank's plans in the global market and how regulation will continue to be a factor of consolidation in the industry.
Over the last year, Natixis has been actively increasing its senior headcount in the US, APAC and Europe as part of its new approach to grow its equity derivatives business in every market.
"Europe and APAC will have a strong focus from us," says Le Brusq. "The US is also a key market for us but the regulatory environment is more difficult to navigate so our first goal is to establish Natixis as a niche player with the aim of growing organically."
According to Le Brusq, the scalability of the business will be higher in Europe and APAC with some individual markets such as the UK and France getting extra attention as the bank closes the gap and catches up with its competitors.
"We are entering a phase where we need to improve our coverage across the board including our internal commercial client network within the BCPE group," says Le Brusq. "There are huge opportunities for us within the group and we need to tap into those clients and build relationships. At a global level, our goal is to occupy more ground and make Natixis more visible."
The bank, says Le Brusq, has been working with Asian clients recently and the appetite for structured solutions especially in the context of the low interest rates environment is definitely there. "Clients see Natixis as a partner that can help them to achieve their investment objectives and we are committed to serve them," he says.
The way Natixis understands this business is not about short-termism but about the long haul, says Mehrez. "Our goal is to establish long-time relations with our clients," he says. "We're not interested in selling products but on providing value. We think this approach will help us to build a strong franchise."
Mehrez says that pushing products is something of the past that has no place in today's market. "We are going to be very careful with the products we offer to our clients and we will take into account things such as correlation," he says. "We don't want our sales team to pitch our products in the wrong way and we have to make sure we provide investors with any possible downward scenarios and how different factors such as volatility may impact the performance of a given product."
The bank's philosophy in the structured products market is that "structured products are for everybody but not all structures are suitable for every investor." Some people say that innovation will only come in the underlying side, says Le Brusq, but we believe there's still a lot of room on the payoff side to address investor's needs as long as you take into account the risk profile of the end investor.
"One of the unique selling points of Natixis when we provide ideas to clients is also to find the most appropriate payoff to achieve the client's objective and this applies to a diverse pool of investors (institutional investors, retail investors...)," he says. "Our view is that the features of the products need to be somehow less complex but there are payoffs that can provide a lot of value on specific structures."
Both Mehrez and Le Brusq point to worst-of structures as products that were detrimental to investors and were pushed because they offered higher coupons.
"There is a price to pay and the risks were never explained properly to the end investor," says Le Brusq. "That is why we are not doing worst-of structures which continue to be structured by many of our competitors. Many clients suffered for that and the industry was stigmatised but I think it was deserved."
This, adds Mehrez, has driven the industry to approach the business differently with more caution and making sure the typology of products on offer are straight forward and based on simple structures that still can provide good returns.
"Instead of offering worst-of structures which imply buying correlation we are offering best-off structures which imply selling correlation," he says.
Le Brusq also points to the training of the bank's sales force as an area of focus to be successful. "We have introduced a very rigorous and strict training program for every single platform to make sure our sales force is aware of the different risk profiles and the products that are appropriate for each profile," he says. "We have seen in a few months that the existing lack of training has been turned around and our sales force is much more motivated and have improved their skills."
According to Le Brusq, the idea behind this is to deliver a consistent message from Asia and to target the appropriate investor in terms of features, structuring, etc.
"The bottom line is that we believe that our business model is based on providing good ideas but we need to communicate and pitch those ideas effectively and optimise the way the message is delivered," he says. "One of the lessons the crisis brought up was the need to improve the training of the sales teams."
Another consequence of the crisis, says Le Brusq, was the loss of trust from investors, and the regulatory overhaul which although it is a cause of uncertainty it is "an external factor" brought in by the behaviour of some banks in the run up to the crisis.
"If the regulatory environment becomes something that is in the way of businesses this could have an impact on the level of involvement from the different players and could have a negative impact on investor choice," he says. "There are already some countries where it is more difficult to promote these products. I think regulation is still a big question mark for most players in the structured products market."
Natixis has stopped completely proprietary trading because of regulatory issues but also because the bank does not want to add any more volatility on the PNL.
"We have a mid-term objective and we don't want any disruption to that process," says Mehrez. "On the Mifid side we don't have any issues because our business meets all the requirements on transparency, disclosure, etc."
In a way, adds Mehrez, some of the regulatory provisions on capital, etc. could present an opportunity for the bank as it has made significant advances on its leverage ratio, and on its solvency capital ratio.
"This could provide us with an edge over our competitors," he says. "Our assets have increased by some billions compared with last year and that has opened up even more opportunities. We also have the responsibility of educating our clients on how to invest safely on equities. Insurance companies have decreased their exposure to this asset class and we believe that is wrong because the interest rates are very low, credit spreads are very low and the only way to achieve good yields is to go long on equities."
According to Mehrez, this is where structured products have a role to play because they can still offer exposure to equities without direct investing but that the challenge is to leverage the knowledge and bring new ideas to the discussion.
"In my view those with good financial engineering capabilities will have a lot to say in this market going forward as they will be able to address some of the market issues and still provide quality solutions," says Mehrez.
In the idea generation process, Le Brusq, sees proprietary indices as a driver of future sales and a result of the industry evolving to cater for different audiences and risk profiles.
"This is a good example of the convergence of the structured products industry with the asset management industry," he says. "We would not offer prop indices to retail clients but institutional clients have other needs and they use other wrappers. We believe that innovation rather than coming from one of those elements will come from the combination of those elements."
On the back of these developments, says Le Brusq, Natixis is building a diverse set of capabilities to deliver on each front and add value to each type of investor.
"Clients are interested in returns and we need to be able to meet that need," he says. "The current environment has brought back the need for structured products at many levels but there are issues such as the cost of providing capital protection. However, investors now understand that to get the coupons they are after they will have to give some of the protection."