The Chinese bank has reported an increase of 40% in structured products issuance year on year.
The banking arm of Ping An Group has won the Best Distributor, Commercial Bank accolade at the SRP China 2021 Awards after trading over CNY800 billion (US$118.6 billion) worth of structured deposits and delivering an averaged annualised return of 3.5% from October 2020 to September 2021.
The sales volume was generated from approximately 600 products at CNY340 billion for retail and 10,000 products at CNY470 billion for corporates at Ping An Bank.
Structured deposits represented a new business for our team - Wang Xin, Ping An Bank
There were additional nine rolling-over structured deposits, known as ‘滚动开放型产品’ which track the performance of EUR/USD, the seven-day inter-bank fixed repo rate (FR007), gold (AU9999) or XAU/USD. Six of them were offered to retail clients and three to corporates - the average daily assets under management (AuM) reached CNY10 billion and CNY4 billion, respectively.
The products were all denominated in Chinese yuan and offered full principal protection, although the bank also issued several structured deposits in US dollar during the year. For the new issuance, the most used payoffs were double digital calls (看涨三层区间型), range accrual and autocall.
Approximately 10,000 structured deposits matured or were redeemed in advance from October 2020 to September 2021, delivering an average return of 3.5% pa. CSI 300 Index-linked products were the best performing with an average return of 5.22% pa., followed by CSI 500 Index-linked products, which delivered an average return of 4.98% pa.
In an interview with SRP, WANG Xin (pictured second from left), head of structured products, financial trading department at Ping An Bank elaborated on how her team has adopted a brand-new issuance strategy in a response to the regulatory shift and market environment after she took up the reins in late 2020.
How has the issuance of structured deposits changed in 2021 year-on-year? Why?
Wang Xin: The AuM was stable as at end of 2021 compared with a year ago. In terms of issuance amount, there was an approximately 40% increase for both non-rolling over and rolling-over structured deposits.
We focused on short-term products, ranging from 10 to 30 days, so the frequency of rollover accelerated. The strategy aimed to reduce cost. The yield curve normally slopes upward as duration increases. An investor usually expects a lower return from short-term products compared with long-term ones. For rolling-over structured deposits, many investors choose to continue to reinvest by simply leaving their capital as it is as they have no capital needs. By tenor, seven days is more popular than 35 days or 98 days. We got to leverage a relatively stable long-term debt with seven-day capital costs. The average rollover period of seven-day products amounted to about one month, while the period was about three months for 35-day products.
Shortening the investment period also works for non-rolling over products. Both corporate and retail investors have liquidity requirements based on the feedback from our relationship managers. In the current market environment, they probably prefer not keeping money in the bank for a long time. Therefore, a product with a short term of one to three months are sold better than a product of one to three years.
How have you and your team implemented the new business strategy?
Wang Xin: In view of the current regulatory environment, volume control is only a means in the structured deposit market. The ultimate goal is to restrain the use of high interest rates to attract deposits at banks. Regulators encourage banks to reduce the cost of debt, so the interest rates of loans lent to small and medium-sized enterprises could go down. Before 2021, most of the structured deposits we issued had single reference assets. The most common structure was range accrual linked to three-month USD Libor.
The business was gradually laid out in Q1 2021 after I took over in Q4 2020. Structured deposits represented a new business for our team. In 2021, we focused on standardizing and optimising the issuance processes. The personnel involved, as well as the front, middle and back-end systems all needed to make a change. At the same time, the relationship managers had to understand floating rate products especially their risk, which are disparate from fixed income products that they used to be familiar with. We did about 20 training sessions with the branches in 2021. Accordingly, marketing and investor education also changed.
Nowadays we have more than a dozen structures on-shelf. To be able to offer a variety of underlying assets, Ping An Bank purchased relevant data and pricing models. The increased option strategies also required more advanced pricing and valuation systems. Therefore, our entire system for structured deposits had to be rebuilt. The new system can automatically generate product prospectus as well as announcements, and accurately observe the establishment and expiration of each product. In this way the automation is achieved among multiple systems and the operational risk has been greatly reduced.
What is Ping An’s edge in terms of product offering?
Wang Xin: We’re relatively conservative when it comes to innovation of underlying assets and payoffs. However, we’re proud of our capabilities of tracking the structured deposit market in real time. Specifically, we adjust the offerings based on market every week by launching or removing products. This requires close market observation, thorough research and proper assessment of customer needs. The staff also had to improve work efficiency. We hope to meet the needs of customers as much as possible while the products can truly reflect the changes in the market condition. For example, we may increase payoffs like range accrual in a fluctuating market. Of course, customisation is also available.
At some banks in China, the offerings of structured deposits are less flexible. They choose to market a number of products across various underlying assets and payoffs at one time – these products do not get updated in a week. This shows how we differ ourselves from competitors.
How is technology used to improve the processes when managing structured products?
Wang Xin: Our structured product team comes up with an updated list every week, which covers the indicated pricing of two to three underlying assets and payoffs across different tenors (usually one, two, three, six and 12 months). The list is sent to relationship managers and product managers through a channel team for them to communicate with customers. We will calculate the pricings and roll out the products for subscription after receiving feedback on customer's risk appetite and needs.
In early 2021, this process was done one-on-one by email or phone till we developed a semi-automated pricing template late in the year. The managers can now fill in the product tenor and expected return from customers, and then calculate terms like strike price. We hope to fully automate this process in the future. By just looking at the front-end system for structured deposits, our budget this year is almost doubled compared with 2021.
What offerings would you highlight in the past year?
Wang Xin: Ping An Bank was among the first ones to issue structured deposits with double digital call options on the CSI 500 Index back in February 2021. Subsequently, offerings like this began to mushroom. In fact, the payoffs and underlying assets offered in the Chinese market will eventually end up being similar. What we can do is to respond to the needs of customers and adjust our product solutions faster. In 2021, we issued some long-term EUR/USD-linked products, which only collected average sales volume of less than CNY1m-equivalent. But their performance has been fairly good.
In the first quarter of 2022, the stock market delivered low returns in general. In a response, we launched some products linked to foreign exchange (FX), gold and a new underlying index - the Hang Seng Index (HSI). The overall sales were subpar. In fact, these offerings may fit the market environment, but they will eventually be removed from the shelf if customers aren’t appealed. Chinese investors favour stocks, which were on a rally last year - as a result our products posted decent sales volume and return driven by equity index-linked products. One of the challenges this year is that we are unlikely to see a fruitful year due to the lack of investors’ confidence. Although the products we issued with a put option on stock indices overall performed quite well in Q1 2022, the sales volume turned poor in the second quarter. In view of the risen market volatility this year, we’ll face a relatively major challenge to bring products that generate satisfying returns.
What are your plans going forward?
Wang Xin: The free trade (FT) structured deposit market is very small in China, but there are still corporate and retail investors holding foreign currencies. Most of them prefer fixed deposits, but there is some demand for US dollar-denominated structured deposits. We issued a batch of USD-denominated structured deposits in 2020 and halted the offerings in the following year due to various reasons, such as demand. We plan to restart it this year.
FT investors are corporate investors with FT accounts, which have some offshore Renminbi (CNH) on the side. The feedback we've received is that these customers are interested in overseas underlying assets, which is also the case for investors who hold US dollars in China. The dollars may involve some overseas transactions. These are some things we’re looking at.