Growth of structured product markets in the new Europe

Central & Eastern Europe

While the established European structured products markets are reaching the ‘mature stage’ of their development, bankers are busy developing fresh pastures for their products. Countries in central and eastern Europe, particularly Poland, Hungary and the Czech Republic, have been among the most exciting growth areas for them, not least because these markets offer wider margins and keen investors with a strong, sophisticated appetite for the products.

Poland

The development of the structured products market in Poland has been rapid, according to Yann Garnier, head of structured products for eastern Europe at Société Générale (SG). “Growth rates have been fuelled partly by the decrease in interest rates, partly by the local stock market boom, and partly by foreign players’ moves to snap up local retail banking networks,” he says.

Rates have gone down from 7% in 2004 to 4% today, while the local stock market index has tripled in the past four years. Meanwhile, banks that have invested in Polish retail networks have provided further stimulus for investors to turn to structured products, having worked fast to shift investment patterns from the traditional low-margin deposit business into structured products and mutual funds. “As a result, the mutual fund market has exploded – with €25bn in assets under management at the end of last year, up from just €9bn in 2003,” says Mr Garnier.

“Similarly, we estimate that about €600m-worth of structured products were sold in Poland in 2006, up from €50m-€100m in 2004. This year, a further €1bn-worth of products will be sold in the Polish market.”

The products sold in Poland are not very different from those sold by networks elsewhere in Europe, according to Mr Garnier. For instance, KBC, which has a large Polish network, is selling the same sort of products into Poland as it sells in Belgium. “They are simply denominated in the Polish zloty and typically linked to Polish underlyings,” he says.

Czech Republic

The situation in the Czech Republic is similar to that in Poland: rates have decreased quite strongly, stock market performance is robust, and retail networks have again been bought up by the likes of KBC, HVB (now UniCredit) and Citigroup.

The local structured product market did not really kick off until 2005 but, with annual structured product sales of about €500m-€600m, it has quickly become very sophisticated and competitive.

The local stock market index rose 15% in 2006, and has risen another 35% since the beginning of this year, but Mr Garnier says that Czech investors have tended to be more open to foreign assets than Polish investors, and that most products sold there have been linked to foreign assets.

“In this market, it is simply a question of adapting products into fund form and switching them into the local currency – otherwise they are very much the same as are sold elsewhere in Europe,” says Mr Garnier.

One example is an SG structured product sold by Komercni Banka KBC from the KB Max Funds range, he says. “These are five-year capital guaranteed products based on the Amaranthe structure already widely sold in France. The only difference in this instance is that the product is sold in local Czech regulated fund form and denominated in Czech koruny.”

Hungary

Hungary is a slightly different proposition for those involved in the structured product business. Interest rates are still relatively high at 7%, owing to political instability and, unusually for the region, a local bank has played a leading role in the local structured products market.

OTP Bank, the largest bank in Hungary with an estimated 30%-40% market share, has been actively marketing structured products – although typically these have been structured as funds and mostly linked to fund underlyings managed by the OTP group.

OTP is in the lead in Hungary, but foreign players have also been quick to buy up local retail networks and the structured products market has developed fast as a result, Mr Garnier says. Overall, he estimates that the Hungarian market has structured product sales of about €500m-€600m and growth rates of 20% a year.

Gaining access

SG, which does not have a network in these countries, has depended on a concerted and successful strategy of building relationships with third-party retailers, on rolling out educative initiatives and on sponsoring innovative product development.

“We focused on the markets from as early as 2001, engaging in a lot of education and relationship-building with distributors, showing them what had been sold elsewhere,” says Mr Garnier. “We also built up our local asset capabilities, opening trading books on Hungarian, Czech and Polish stocks and local indices. In a second step, we started building up books in the emerging markets these investors were starting to look at: Turkey, Russia and Egypt, for instance. In a third step, we started to offer capital guaranteed structured products linked to the local mutual funds, which are very fashionable, particularly in Poland and Hungary.”

SG has also used two other distribution channels as a means of developing its ‘virtual’ network across the region: the fast-emerging local private banking providers and the life insurance sector.

Until 2005, the mass affluent and high net worth individuals in these countries went to Switzerland and Luxembourg to bank, but onshore services have increased dramatically since then. Since most of these work on an open-architecture basis, selling the same kind of product that SG might sell into the more traditional private banking markets, the bank simply adapted its normal range of products for the local markets. “The products are still mainly sold in euros, so little adaptation work has been necessary. The main difference is that the investors here tend to want five-year products as opposed to the traditional seven-year products we would sell elsewhere,” says Mr Garnier.

Fast growth

The life insurance sector has grown fast in the three countries, particularly in Poland, where there are attractive tax incentives on the capital gains made on policies. In Poland, SG has structured several deals in the past several months – mostly unit-linked products that are public and sold through normal retail banks.

“Two deals summarise its approach well: one is a capital guaranteed product done together with Commercial Union (owned by Aviva), which is distributed through the Bank Zachodni WBK (Allied Irish’s Polish retail network) and linked to BZWBK’s Arka funds,” says Mr Garnier.

“The bank did a similar deal with Nationale Nederlanden, sold through ING’s Polish network, ING Bank Slasci, and linked to ING TFI funds. In Hungary, SG put together another such deal with Generali. A unit-linked product, this was a constant proportion portfolio insurance product linked to a portfolio of indices and sold directly by Generali agents.

“The life sector is a new client niche that we started exploring in June last year and has been increasing successfully. We expect to do more of these structured product/unit-linked deals because the life insurance business is growing fast in the region and rates on life policies are declining fast, so investors are keen to get some equity upside and yet retain some sort of capital guarantee.”