Distribution: Shaken supremacy

Special report: Focus on Spain

Market estimates say that Santander and BBVA hold more than 50% of the retail and private bank market in Spain, with the third largest distributor, La Caixa, dwarfed by the dual powers. In 2006 Santander issued more than Euro 6 billion of retail structured products and its private bank arm has approximately Euro 30 billion of assets under management. BBVA has a similarly sized business, meaning between them they effectively control the retail and wealth management business in Spain.

However, this situation is beginning to change as foreign players and even some smaller domestic banks take market share from the Spanish giants. This can be seen most clearly in the private bank space, where foreign banks including Merrill Lynch, Barclays Capital, SG CIB, BNP Paribas and Goldman Sachs have all begun to distribute structured products to clients in Spain.

Merrill Lynch, the world's third-largest wealth manager, has recently made the Spanish private bank market one of its priorities. For private clients in Spain it has sold basket of funds, shares and index linked products, says Maria Armijo, equity derivatives manager at Merrill Lynch in Madrid. And opportunities for foreign banks are now increasing from a commercial and regulatory perspective, she says.

"Santander is losing a lot of business. Its assets under management were down in 2006 and they are not picking up this year," Armijo claims. BBVA have done well to hold ground, she adds. As the regulator opens up the market for new products, there will be more revenue to come for banks such as Merrill, she says. "The Spanish market does not compare in size to the big European markets but it is starting to emerge."

Foreign force

Barclays Capital agrees that the foreign push is a relatively new trend in Spain. "The wealth management market in Spain really opened up two years ago," says Giovanni Bonaccorso, London-based director at BarCap's Investor Solutions. According to an independent source in Spain, BarCap now has more funds under management than any other foreign bank. In part, this could be a result of the many affluent UK residents who have settled in Spain, but domestic investors are also investing with the UK bank.

"When it comes to structured products, private banks and wealth managers in Spain are open to innovative, more complex structures," Bonaccorso says. "Other than commodities and equities, for example, we have now begun to issue hedge fund-linked certificates."

Tressis, a Madrid-based dealer that sells products to private banks and institutional clients says the Spanish private bank network is expanding. "Previously a few banks had control of the market but now there are more private bank providers,"says Sonsoles Santamaria, Madrid-based director of structured products at Tressis. Regional Spanish saving banks are also securing high-net-worth and affluent clients, Santamaria says. European investment banks such as SG CIB, BNP Paribas and Merrill Lynch have always sold into the Spanish networks but now they are selling more products to their own wealth management networks, she adds.

UK index provider FTSE bases its Southern European operations in Madrid and has noticed the changes happening in the market during the past 12 months. "Foreign banks and local savings banks have started to come in and are attracting clients at the high-net-worth level," says Pito Nadal, regional manager of Southern Europe at FTSE indexes. BBVA and Santander still lead the pack by a considerable margin but it's no longer a case of there being only two players in the game, he adds.

So far, the move away from BBVA and Santander might be small but it is having an effect on the market in other ways. One feature of the Spanish market has been that the dominance of the big two players in both private and retail markets means that often there was little to distinguish between product trends. But the market shift is impacting both retail and private trends. "Before, Spain was the market for the 'big volume issue' - the big banks would market a single product heavily and sell huge volumes in both networks," Nadal says.

This was usually in a wrapper of mutual guaranteed funds with longer maturities, but Spain now has more product launches that feature smaller issue sizes and shorter maturities. Retail and private clients are becoming increasingly sophisticated and have shaken up product offerings in terms of wrappers, liquidity and underlyings, Nadal adds.

There has been a move towards new structures, for example. Sales of deposit-linked products have increased from less than 10% of the market in 2003 to almost 30% in 2006. This can largely be attributed to the rising market share of Spanish savings banks such as Caixa Nova and La Caixa, but foreign players have also played their part. The market is also starting to see a large number of products with one- and two-year maturities.

Underlying development

The Spanish market is also seeing new features in terms of underlyings. Foreign banks such as SG CIB and BNP Paribas been innovative in this area, Tressis's Santamaria says, but domestic players such as Santander and BBVA are also following suit in response to market pressure.

BBVA, for example, has for the first time offered multi-trigger options on baskets of shares with its BBVA Objetivo and BBVA Triples, where previously its main offering used the Ibex 35. And in late 2006 Santander achieved success with a hybrid equity and interest rate product called the Double Opportunity Note and also with a hedge fund-linked product that was sold in retail and private networks. In fact, the use of hedge funds as an underlying is the hottest topic to arise out of the product evolution in Spain.

Altitude Investments, a London-based alternative investment firm jointly owned by BBVA and New Finance Capital, provides hedge fund underlyings for products sold in Spain. Altitude has sold hedge fund underlyings for products sold by Spanish banking groups BBVA and Caixa Nova, says Antonio Viola, the firm's chief executive. The products have been sold to both private and retail clients. Viola says providers are searching for more diversified underlyings more than ever before.

As the proliferation of new products gathers pace, Spain's financial regulator, Comision Nacional del Mercado de Valores, is under pressure to keep up with market developments. Some confusion still surrounds the use of hedge funds in Spain, for example. The regulator decided to allow investment into hedge funds in June 2006, but onerous restrictions are still in place, particularly surrounding the use of fund of hedge funds.

Dutch investment bank ABN Amro is more focused on the institutional space in Spain and says that this side of the market is definitely open to foreign banks. "BBVA and Santander are major players in the market-place, but institutions have been buying structured products from foreign players for some time," says Jose Ignacio Vidri, Madrid-based head of Spanish institutional sales at ABN Amro. The bank currently has no private bank or retail platform based in Spain.

However, even though they may be losing market share, BBVA and Santander remain powerful players. It is unlikely that either will ever be replaced as the top two distributors in private or retail networks in Spain.