Banks selling structured notes (Certificado de Operacoes Estruturadas - COEs) in Brazil since January are using the capital protection and diversification features of the products to pitch them to private investors, according to the Central de Custódia e de Liquidação Financeira de Títulos (Cetip), one of the clearing houses authorised by the Central Bank of Brazil and the Securities and Exchange Commission (CVM).
According to Cetip, COEs continue to gain traction among investors and have recently surpassed the BRL2bn ($900m) milestone in issuance.
According to the clearing house, only Bradesco had captured until early March, BRL150m ($67.5m) from the sale of COEs when the initial expectation was that this figure would be reached by the entire market in the first months of activity. “This shows that the product is very good and [the segment] is steadily growing,” said Ricardo Scarpelli, director of Treasury at Bradesco. “The COE startup has been better than expected.”
Scarpelli stressed that sales strategies should assess product suitability as an essential tool to ensure that products are appropriate for investors. “Our offerings today are focused on private clients, and [are aimed at investors] within a high income range that makes them almost private banking clients,” said Scarpelli. The minimum investment required for Bradesco’s COEs is at least $3m ($1,350).
Suitability
Itaú, whose products are also aimed at high-income clients, said that the sale of COEs follows the same sales principle of other investment products, which is to use them within the concept of portfolio management.
“The COE becomes another tool used to position the portfolio of a client,” said Charles Nogueira, chief investment officer at Itaú Private Bank. “With the advantage of the flexibility [COEs] bring to a portfolio.”
According to Nogueira, COEs with capital protection have a strong appeal while Bradesco’s Scarpelli said that the best way to captivate investors is by offering simple structures.
The two executives believe that the best way for COEs to make inroads into the wider market is by selling simple structures and products with capital protection aimed at high income investors. “For now, we will follow that [approach], but I believe the next step will be towards products with controlled loss, stipulating a certain percentage of portfolio loss,” said Nogueira.
Scarpelli, however, said that the market’s dynamism can lead to many paths, and that the market requires caution. “COEs allow multitude combinations of fixed and variable income, yet we are currently choosing ‘pure’ products,” he said. “Sophistication will only come with time.”