The product will be distributed and hedged in-house as the South African bank’s nascent wealth & investments unit expands its offerings.

First National Bank (FNB) and Rand Merchant Bank (RMB) are the respective primary distributor and derivative counterparty, both of which are wholly-owned by FirstRand Bank, the issuer.

The structured note market in South Africa has grown a lot over the last decade led by two to three active issuers - Samukelo Sifiso Zwane

Denominated in rand, the three-year structured note offers 100% capital protection at maturity, along with exposure to the MSCI World Index through uncapped participation rate of 110% and the USD/ZAR rate. The minimum ticket is ZAR100,000 (US$5,300) with a unit price of ZAR10,000.

“The structured note market in South Africa has grown a lot over the last decade led by two to three active issuers,” Samukelo Sifiso Zwane (pictured), head of product, wealth and investments at FNB.

“We try to reduce that concentration risk by issuing our own structured notes. This time we started from scratch and are confident that we will make a dent in terms of assets under management (AuM) in the structured product space in five years’ time.”

In 2022, a total of US$7.6 billion structured notes were issued by a group of 15 domestic and foreign players in South Africa, mainly sold to high-net-worth individuals (HNWIs), approximately 20% of which is ZAR-denominated while the remaining in hard currency, according to data compiled by a local investment bank and provided to SRP.  

The issuance volume translated to 2.8% of that in the US retail structured note market or is 1.8x that for the entire structured note in Thailand during the year, SRP data shows.

“We've been focusing on building up protection for clients on top of fixed deposits for the last four years. It started from guaranteed life annuity followed by guaranteed growth plans and guaranteed income plans,” said Zwane.

“Then we saw the need for clients to be exposed to the market, but with protection due to high market volatility and increase in frequency of black swan events.”

FNB has additionally marketed two bespoke USD-denominated autocallable notes issued and hedged by UBS, which are also linked to the MSCI Word Index. The autocallable period for these five-year products starts from the third year with annual observation frequency.

The first product offers 100% capital protection and an indicative return of 5-6% pa. if the final index level is above the initial leave; the second structure offers 80% capital protection, offers an indicative return of 7-8% pa. The minimum ticket is US$25,000 with a unit price of US$1,000 for both.

“The MSCI World Index is easy for clients to understand,” said Zwane. “We want to keep ourselves honest to clients by delivering simple products and will stick to this philosophy when introducing new structured products going forward – scheduled around every four months.” 

The oldest South African bank is considering the expansion of its investment products to cover endowments, a type of structured products for estate planning purposes that allows clients to select beneficiaries. 

All the three offerings are open for subscription until 27 October with the strike date set on 10 November. An initial once off fee of three percent will be charged.

Dual listing

The ZAR-denominated product will be listed on the Johannesburg Stock Exchange (F100CPZAR) while the other two will be listed on the Swiss Exchange (CH1286344663, CH1286344671) on the trade date.

Zwane noted that the products are also accessible at FNB’s African subsidiaries including in Eswatini, Lesotho and Namibia where structured products “are not commonly available”.

“A total of ZAR100m would be a good start in terms of issuance volume,” said Zwane.

The products are available for FNB’s private wealth clients with an income of no less than ZAR1.8m on FNB App or online banking with no brokerage fee, and through the bank’s portfolio managers and wealth managers or independent financial advisors.

For the year ended on 30 June, FNB generated ZAR18.2 billion normalised earnings, up six percent year-on-year, on back of 8.25 million retail customers and 1.21 million commercial customers.

The earnings represented 73.4% of the total at FirstRand Bank and 1.97 million out of the retail are classified as private clients who own relative income of over ZAR450,000, according to FirstRand Bank’s latest annual report.    

For the USD-denominated products, clients at FNB can utilise the bank’s asset swap capacity free of charge without having to turn to their foreign allowance.

“These is part of the democratisation of investments that we're hoping to achieve whereby investments become more cost-efficient for clients,” said Zwane.

South Africans over the age of 18 are granted a single discretionary allowance of up to ZAR1m and foreign investment allowance of up to ZAR10m – a lift from ZAR4m on a per calendar year basis.

Zwane also highlighted the significance of ensuring FNB’s structured products fit into its digital platform strategy where third-party structured notes used to be available.

“Our clients should be able to access these solutions digitally through the app and other online platforms just like other products,” he said.

To promote the new offerings, a main challenge that Zwane and his team are facing is the education for FNB’s private wealth clients, which concentrates on how a structured product works and to how the product fits into their portfolios.

Zwane added that it is as important for the bank to ensure the distributors are accredited by the Financial Advisory and Intermediary Services (FAIS), specifically the CAT1.24 and CAT1.18 across onshore and offshore.