Natixis posted net revenues of €176m for its equity divisions in the second quarter of 2016, a 4% year-on-year increase, and continued the expansion of its equity derivatives business with net revenues up 1% in 1H16 boosted by the solutions business, however the French bank remains a marginal player in the US retail market. SRP spoke to Sebastien Lafosse (pictured), executive director, head of cross-asset structured products distribution Americas at Natixis, about the US market, the bank's plans and the challenges ahead.
"Since I joined in in September 2015, we have introduced a number of key developments around our product offering and client coverage," says Lafosse. "Also, as a result of the increased activity at Natixis we have added a number of executives to our structured products team as we increase our market penetration in the Americas (US, Canada and Latin America)."
The most recent addition to the team in New York was Romain Le Bon who joined as director in structured product sales for the Americas, reporting to Lafosse and Leonardo Marti, head of Latin America structured products sales for Natixis CIB Americas. Earlier in April, the French bank had reorganised the managing structure of its global portfolio management, equity derivatives and fixed income teams with a number of senior management appointments.
"We have also increased the number of distributors we work with and are now focusing on optimizing the coverage of key clients in the US, in order to ensure that Natixis is providing the best execution, service and ideas to the market," says Lafosse.
According to Lafosse, although the bank has a strong focus on institutional clients, the structured products team's mandate is "to build a comprehensive offering for the domestic and offshore structured retail products market".
In relation to the market environment, Lafosse points at a slow-down in activity across the board. "Generally speaking the market in the US has been quite challenging compared to last year," says Lafosse. "On average, the number of issuances is down and the volumes are still on average lagging 30% behind 2015."
This decrease is linked to a number of factors and was triggered at the beginning of the year by the spike in volatility in the US markets, according to Lafosse. January and February are traditionally the strongest months in terms of issuance in the US, "and when you encounter a disruption at the beginning of the year the market struggles to recover to its previous level, and usually lags for the rest of the year".
"Then came the Brexit vote which has not helped either because retail investors retreat when there is volatility and uncertainty in the market," says Lafosse. "Even though the equity markets are trading at historic high levels and the recent volatility has provided opportunities for tactical investing it is hard to make a case for investors when you don't have a visible trend on which to capitalise and provide a narrative for retail investors."
The pricing environment continues to leave very little room to provide protection and meaningful upside and is affecting issuers' ability to offer full principal protection because of the impact on the pricing of the derivatives, but after a number of years in a low-rate/low-vol environment, investors now understand that in order to get upside you have to give up some of the protection, according to Lafosse.
"The market has adapted relatively well to the challenges around the pricing environment with payoffs that can extract value from the current market rally and also with the introduction of new underlyings that can provide good potential for returns," Lafosse says.
As part of its strategic plan Natixis is also moving to expand its coverage and serve other markets in the Americas. "We are putting a lot of effort into developing our capabilities to serve those two markets [Canada and Latin America]," he says.
According to Lafosse, the Canadian market has "its particularities" as not every firm can issue products. Natixis does not have a structured notes issuance program in Canada and cannot issue products to the market. "However, we are working on an over-the-counter (OTC) basis to develop ideas that can be then re-packaged as structured notes by local issuers," says Lafosse. "In Canada, our goal is to engage with issuers and distributors to bring new ideas around underlyings and payoffs. Canada is a more concentrated market because you only talk to a handful of large issuers but this is a developed market and is more receptive to new ideas."
In Latin America, Natixis remains "very active" as it continues to build up its presence. "We have been a strong player in this region over the last few years," says Lafosse. "Natixis has invested heavily to build its capabilities in the region, including the opening of offices in a number of countries over the last two years."
Lafosse claims to have a strong footprint in the main Latin American cities compared to its competitors as well as a number of dedicated people on the structured notes team working with Latin American clients. "There are challenges in the region because each country has different regulatory requirements but we are making progress in every market," he says.
As for the Brazilian market, Natixis has not entered the domestic structured notes (certificados de operaçoes estruturadas - COE) market but remains active in the traditional offshore private banking business.
"We see Brazil as a very interesting market to increase our coverage," says Lafosse. "There are a lot of pockets of liquidity in the region and there are opportunities around mid-size wealth management firms. There is a lack of connectivity between these advisers and structured notes issuers, and we are well positioned to fill that gap."
According to Lafosse, most Latin American high net worth investors have managed accounts with the top investment banks but "they do also appreciate having a local presence and point of contact to give them financial advice on their assets".
"We are trying to target those HNWs, family offices and mid-size broker-dealers and private banks," Lafosse says.
On the difficulties for multi-issuer platforms to succeed in the region, Lafosse argues that the US and Canadian markets are very much concentrated among a few large distributors, and this would make it difficult for any attempts to set up multi-issuer platforms in those markets, although in Latin America there is scope to increase the connectivity between the sell and buy-sides.
"Two thirds of the issuance goes through those large Private Banking channels," says Lafosse. "This high concentration of distributors makes it difficult for platforms to develop as each distributor has a different setup. In Latin America there is a need to fill gaps around issuers and distributors and multi-issuer platforms could be an interesting solution to address this problem. However, there are also issues around these platforms that need to be addressed as you cannot have a single issuer controlling the platform."
Conflicts of interest, domestic regulation and other operational issues will need to be solved before these platforms are successful in the region, concludes Lafosse.
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