Best in Australia - Citi

The market in Australia has received some shelter from the past year's financial crisis because fewer Lehman Brothers-backed products were distributed there than was the case elsewhere in the Asia-Pacific region. That aside, there has been no respite from inhospitable equity markets or the ever-present uproar over structured products in the region.

"Investors were very much withdrawn, cashing up, and less willing to entertain the idea of investment products, whether capital-protected or not," says Gidon Kessel, chief product manager, investments and treasury products, wealth management at Citi in Sydney.

Citi has battled through these obstacles to maintain momentum, issuing new products every month while other providers have seriously scaled back. As of late July, Citi had offered 15 products since the beginning of this year, selling an equivalent notional value of US$116 million in both Australian and US dollars. The bank also embarked on its first national press campaign (in conjunction with the issuer) for a retail product, as well as stepping up internet advertising.

It has been no mean feat staying afloat in a market where clients have been turning their backs on products that provide equity exposure. Citi took advantage of low deposit and cash rates and its own high funding spreads to launch simple payoff fixed-income products that matched investor sentiment.

The MLI Income Earner, for example, is a four-year trade that pays 7% annually (for the Australian dollar version) and protects capital 100% at maturity. "As part of the funding payoffs we introduced, this was probably the most simplistic of them all," says Kessel. "You could proxy this against a Citi bond, but that's not widely available to the retail market space. We opened it up to a wider audience." The minimum investment in the product was A$10,000 (US$8,400), and rates at the time it was launched in April were at around 3-4%. "We saw tremendous volume on these trades - one trade alone we did was closeto A$40 million."

Although rates are still low, there is palpable sentiment they will pick up when markets begin to recover. Aligned with this view, Citi offered an income switch product, which pays a fixed rate for the first year, then a floating rate of three-month BBSW, an Australian version of the interbank offered rate, plus 2.1% for the remaining three years. Five tranches were launched with a total volume of A$39 million.

Now that stock markets have begun to rally and investor appetite has improved, Citi has begun reintroducing equity-linked products. One recent launch was a 100% capital-protected product incorporating a lookback option, which saved investors from trying to time the market.

"This product was really aligned with those clients who felt that in the short term there was going to be volatility and didn't necessarily want to time the market - this lookback feature accommodated that. They were still bullish on equities in the longer term, but were concerned about short-term volatility," says Kessel.

The four-year and four-month structure works by looking back at the first six months of the investment and determining the optimum entry point into the S&P/ASX 200 index. This is then selected as the strike level from which index performance is calculated. Equally it uses averaging at maturity over the final year of the product to smooth out index performance. Investor participation in the index is 100% up to a cap of either 55% for Australian dollar investments and 28.5% for US dollar-denominated investments.

"Our base is quite broad, we have non-residents as well so we offer different denominations of both Australian and US dollars," says Kessel. "That distinguishes us and it always has - there are lots of Asian clients who are experienced on this product set that we cater for locally."

After-sales service has been stepped up in the wake of the crisis to make it easier for clients to find out how investments have been performing, which also meant improving the internal information hub to give better access to mark-to-market values and in-depth analysis of how underlyings have performed.

Other distributors in the retail market lauded its approach, one saying it has "given the best service this year" in the Australian market.

While the Australian market has been more resilient than most to the Lehman collapse, the bank's disclosure surrounding credit risk has also been improved in response to client concerns. Additionally, the sales force was given more education on credit risk and information on the issuers Citi uses. "We found that's worked very well, we've been transparent and as such it's been less of an issue for us. We've addressed it head-on to ensure our relationship managers and customers were fully versed," says Kessel.