BBVA's global approach to the structured products universe has positioned the Spanish powerhouse as a market leader, and this strategy is paying dividends in its ability to structure products for all types of clients.
"Our philosophy is to have a global view of the market, products and customers, and we run the business in a very integrated way across underlyings, sectors, customers and types of products, whether they are plain vanilla or exotic," says Ricardo Laiseca, head of BBVA Global Markets in Madrid. "Our strong structuring capabilities mean we can offer products with added value in terms of innovative and complex underlyings - whether they be hedge funds, funds, alternative investments or hybrids - and payouts."
The bank's global markets division has developed strong product capabilities in structuring, pricing and risk management for plain vanilla and more exotic structures to be able to tailor solutions for clients, whether retail or institutional. This strategy means that BBVA has the ability to launch large-scale transactions for the more sophisticated financial institutions but also the flexibility to customise its product range for its own retail network or for distribution through third-party channels such as private banks, savings banks, insurance companies or wealth managers.
"We can design products to fill the needs and requirements of any kind of customer," says Laiseca. "In retail, more customised products are required and the effort is not so much placed on the operations area as it is in the financial innovation, structuring and exotics risk management capacities. This is where BBVA has a long-term experience through its new products team of more than 60 people fully dedicated to structuring, development and risk management activities."
Maxima introduces an innovative cash-in feature and is based on the money market value strategy indicator developed by BBVA's research team. The investment strategy aims to improve classic carry strategies based on investing in currencies with higher interest rates, financed by currencies with lower interest rates. The capital-guaranteed product is structured with constant proportion portfolio insurance (CPPI) technology. The cash-in feature was introduced by the structured products team and, for the first time, has been transferred to foreign exchange products. Here, clients are able to book profits early as the product guarantees a given return when it reaches a certain yield threshold. The deal has garnered EUR170 million in interest from BBVA retail and SME clients as well as private banking, mutual funds and insurance companies.
This strategy was enhanced in Pegasso, a product which allowed clients to select two periods to maximise their benefit. Linked to the performance of the Eurostoxx index, the product offers a one-and-a-half year option with a 100% strike and 112% upside. If performance is over 12% then the customer receives his principal and 12%; if not, the product continues for three years when there is 60% participation if the index rises over 112%.
BBVA has also introduced Alpha Dynamic, a hybrid CPPI product that adapts to changes in the underlying to maximise performance of a dynamic combination of private equity, commodities renewable and sustainable energy. The call knock-out with rebate principal-protected invests 50% of a client's money in fixed format with a 5.5% coupon, and the other 50% in floating format linked to the Ibex equity index. If the value of the index reaches 120% the client receives another 5.5% coupon, if not he receives the appreciation in the index's value.
BBVA has also introduced novel ideas for equity-linked products. Many Spanish investors in structured products preferred capital-guaranteed deals this year, but the EUR50 million RLIM transaction enables them to put 5% of their capital at risk in order to achieve extra yield for their investment. Here, the investor profits if the worst of three stocks rises more than a designated percentage of 5%.
And with the Waterfall deal clients can benefit from rising stock markets but also safeguard themselves from a collapse in the short term. For instance, if three stocks are below 100% of their initial level, a 7.5% coupon is paid and the product redeems. Otherwise, the deal continues for another three years, paying a running coupon of 7.5% if the stocks rise above their initial level. At maturity, if the worst stock falls more than 40% then the customer receives this stock, if it does not fall more than 20% then he receives his notional with a capital guarantee.
One blockbuster deal targeting the bank's retail customers is Cuota Segura, a product designed to hedge the interest rate risk of mortgages. Approximately 7,000 mortgages have been hedged for a value of EUR600 million since June this year. The potential for this deal is immense as only 5% of BBVA's balance sheet has so far been tapped.
The week on Risk.net, December 2–8, 2017Receive this by email