Equity-linked structured products have experienced a boom year in Europe, and Societe Generale has, not for the first time, been in the vanguard of sales to retail buyers.
“In 2017, we have stayed close to our clients and tried to develop solutions in line with their needs. There has been a big surge in autocallable products, mainly in the equity space,” says Philippe Dumont, head of cross-asset pricing for retail and private banks in Europe at Societe Generale.
Many equity markets have been trading at or near record highs. The challenge for the bank has been to bring out products that are attractive to clients in the face of low volatility. The S&P 500 is trading around 2,750, more than 400 points higher than a year ago; the CAC 40 is around 5,370, up more than 10% this year; and the Euro Stoxx 50, one of the main reference points for European equity-linked notes, is more than 500 points, or 14%, higher than a year ago.
This presents a problem for the seller of standard bull-market products such as autocallables; buyers fear that indexes are so toppy such notes will not be knocked out. Consequently, Societe Generale has pioneered the so-called glider autocallable, which incorporates an extra layer of prices at which the note is callable.
Sitting between 65% and 100% of the call trigger price stands the glider autocall barrier. Early redemption occurs if, on any observation, the underlying is observed to be above the barrier but lower than the strike price. Consequently, this product offers the potential for positive returns in a stable or declining equity market.
The auto-glide structure first debuted in Korea in June 2016 and has now been introduced in Europe. According to the French bank, it now accounts for fully one-third of the entire retail market in Korea.
“They constantly try to innovate and show new ideas. More importantly, their innovations make sense and are not overly complicated,” says one judge. “Even though we haven’t traded it yet, I particularly like the glider autocall trigger, and I am sensitive to their credit-linked note capabilities and creativity.”
The proprietary SBF Top 80 Index, against which a range of fixed-dividend autocallable notes are priced, affords exposure to the top 80 French companies by market capitalisaiton and was unveiled in 2016.
In 2017, we have stayed close to our clients and tried to develop solutions in line with their needsPhilippe Dumont, Societe Generale
It is one example of what Societe Generale calls its second-generation smart beta indexes, and some €2 billion ($2.3 billion) has been raised through notes linked to it this year, sold almost exclusively to French buyers. It has also consistently outperformed the CAC 40 over the past 12 months.
Overall, the bank has over 1,300 live proprietary indexes in which there is more than €33 billion in assets under management. This represents a 25% increase in the past year.
While the equity market has taken centre stage in 2017, Societe Generale has also continued to break new ground in credit-linked products, as the judge quoted above indicated, and these have proven appealing with private banks and wealth managers. The bank has been particularly prominent in notes linked to the credit default swap (CDS) levels of four Nordic countries – Sweden, Norway, Finland and Denmark – and Switzerland.
In 2017, the bank priced its first credit autocallable note, utilising the structure that has been so popular in the equity market. The note knocks out when the CDS price of a given credit breaches a designated level.
It also traded reverse convertibles on the iTraxx Crossover with a Swiss investor. The bearish-view note pays a guaranteed coupon at the end of six months as long as the index remains above a given level that is out-of-the-money at inception, but investors lose capital for every basis point it drops.
“Societe Generale has been one of the leading counterparties on credit indexes. They have been providing us with great service and trading capability,” says the head of structured products execution at a large Nordic bank.
The bank has also broadened the concept of socially responsible investment by being the first to launch positive impact finance (PIF) notes. These products seek to deliver a contribution to economic, environmental and social wellbeing because, during the entire life of the investment, SG commits to hold PIF assets equivalent to 100% of the notional of the note.
PIF notes were launched less than a year ago, and they have already racked up €200 million of sales. Though open to all investors they have proved popular with retail buyers, especially in Italy. In July, a PIF note indexed to the Finvex Ethical Efficient Europe 30, an ESG index, was listed on the Borsa Italiana. It was sold to retail buyers through nine banks, including Monte dei Paschi di Siena, Deutsche Bank, Banca Leonardo, CheBanca, Banca Esperia, Iccrea Banca, Banca del Piemonte, Equita and Finanza e Futoro (part of the Deutsche retail network in Italy).
For Dumont, the key to the bank’s success in this credit market is simple. “Our strength lies notably in our pricing. We are competitive,” he says.