01 Sep 2009, Structured Products staff, Structured Products
As the thriving Chinese economy stalled during the global financial crisis, investors were driven to cash and deposit accounts, and also to the more conservative structured products on offer.
One of the few foreign banks with an active structured products operation in China, StanChart took the opportunity to improve its offerings of structured deposits. The Shanghai-based team is run by David Leung, the bank's general manager for wealth management.
"They update us on market segments so that we can brief our clients and change the weights on portfolios. It's not only on the product side," according to one client in Shanghai. And in addition to providing an educational package that impressed the same distributor, the bank has worked closely with its clients to understand what kind of bespoke products they require. "We plan to increase the number of tailormade products that we do for high-end customers," says Jerry Han, a product manager in Leung's team.
The bank also scores highly for its timely product performance data. Aswell as providing daily, weekly and monthly views on the global economy, StanChart is also dedicated to providing more information andliquidity to support its products.
Changes to the offering style have ensured a remarkable increase in the volume of products sold in the first six months of this year, with a rise of 54% compared to the heady days of early 2008. Much of this success is a result of the bank's decision to extend the style of products it releases from purely tranche-based and monthly to the inclusion since August 2008 of flow-based releases that effectively allow for daily launches.
"We are the first institution in China to offer a secondary market with a weekly trading facility, which makes our products very transparent," says Lucia Yuan, another product manager in the same team. The bank is looking to introduce daily liquidity in September, says Han.
Other achievements include the introduction of the first trust product from a foreign bank in China. The local trust product was launched with embedded constant proportion portfolio insurance (CPPI) technology in 2008, and aimed to capture the investment opportunities offered by the local bond market. The two-year product dynamically allocates funds between risky and risk-free assets, maximising returns after a pre-defined safe cushion is secured. The fund's underlying investments include treasury bonds, People's Bank of China notes, high-grade corporate bonds, convertible bonds and other pre-agreed fixed-income instruments and some initial public offerings. Since the June 2009 launch, the product has attracted US$10 million equivalent of renminbi-denominated investments.
Structured deposits have been the most popular structures in China, says Yuan. "Our US dollar London Interbank Offered Rate product was probably the most popular as it is conservative while offering a better return than timed deposits," says Yuan.
"During market stress many investors pulled out of risky markets in search of safer investments," says Sherry Wang Di, a product manager in the team. "We offered a six-month tenor and a higher return than a deposit." The structured deposit, with its three-month US dollar Libor underlying, was launched last August and raised the equivalent of US$42.5 million in renminbi-denominated deposits in one week. The structure is simple and relies on the Libor rate staying within a set range, with the potential for a 5% coupon at maturity. Buyers were from the retail space, enticed by returns of roughly 1.5% above the deposit rate.
Other products from the bank included principal protection with the autocall feature that is so popular with private banks. Commodity-based products were also offered, providing basic access for those Chinese investors previously so fanatical about investing in equities.
A five-year certificate of deposit launched in June 2009 included an innovative autocall feature that enhanced product liquidity. The structured deposit has two Chinese banking stocks as underlyings, selected to capture market recovery. A wider accrual range and the innovative autocall increased safety and liquidity for a product that attracted the equivalent of US$47 million in 10 working days. The autocall operates so that if either underlying closes on a quarterly valuation date equal to or above 120% of the initial price, a knockout event occurs.
The two bank underlyings are ICBC and Bank of China. If both banks close between 65% and 120% of their initial level, investors are treated to a juicy 7% annual return, which is accrued on a daily basis. The banks have a high correlation, which increases the possibility of coupon accrual.
"We still adopt open architecture and deal with third parties," says Zheng Yu Dong, product head in wealth management at StanChart. "We now focus on our in-house structured deposits, but we are also dealing with third-party providers for open and close-ended structured products." The distributor has third-party dealings with Bank of America Merrill Lynch, Credit Suisse, UBS, JP Morgan and Barclays Capital.
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