BBVA‘s managing director of global structured solutions Latam, Manuel Meza Pizá, explains some of the reasons the bank has been named Latin America house of the year in the 2017 Structured Products Americas Awards, most notably how the bank adapts global products to local needs
What are the key differentiators between what BBVA offers and other structured products in the market today?
Manuel Meza Pizá, global structured solutions Latam, managing director, BBVA: BBVA has been working on a client-centric model for a few years now, which means we aim to provide our clients the best possible solutions to their needs. As a global franchise with a strong presence not only in Europe but also in Latin America, BBVA matches local customers with global products and expertise. For example, BBVA has been adapting different vehicles through which it meets the local needs via global products, specifically the quanto exposure to global underlyings, which has been very successful in recent years. Also, the diversity of underlyings and payouts in different markets has been key to the success of the products. We have been able to offer this because of our strong trading desks in Latin America, the US and Europe. So we can offer notes with very different payouts linked to the volatility market of the Mexican interbank equilibrium interest rate (TIIE), foreign exchange underlyings and European or Asian indices.
How has the reversal of USD/MXN strength impacted the popularity of the structured notes issued by BBVA?
Manuel Meza Pizá: Structured products linked to USD/MXN have always been very popular in Mexico, since they provide clients the opportunity to achieve good returns with short-term views. Since the US presidential election, activity has been good – we began to see a segmentation of clients with respect to their views on further strengthening of the Mexican peso versus clients expecting the reversal to end sharply, and a return to levels reached during the election. Because of this, directional notes became the dominant trend in forex notes in the last months of 2016 and the beginning of 2017, with very short-term notes being issued. Conversely, notes betting on low volatility of currency pairs – such as range accruals, which were quite popular pre-2016 – have effectively disappeared this year.
What global macroeconomic factors is BBVA looking at in deciding its future strategy in structure products?
Manuel Meza Pizá: First of all, the future course of interest rates in the US and its influence on Mexican rates is definitely in the spotlight, with analysts now expecting a more dovish stance by Banco de México for 2018. This makes investors very cautious around the risk-reward factor. In an enviroment of rates going up, we will have to adapt the most interesting products for our clients.
Also, the potential changes to the North American Free Trade Agreement and their impact on the Mexican economy is at the forefront of our minds, and could impact on the exchange rate at any time. This may not only change products linked to currencies, but also those in foreign currencies such as single stocks in USD or indices in EUR. The latter is in line with the strength of the European economies and activity in the US.
How have investors reacted to the changing market environment since the start of the year?
Manuel Meza Pizá: We saw the local short-term reference rate go from 3.50% to 7.00% within a relatively short period; the peso going from 18.30 to 22.00 and all the way back within the space of a few months; equities in the US and Europe getting stronger; plus two internal events of particular concern to Mexican investors: capital repatriation implemented by the fiscal authority at the beginning of 2017, and the elections taking place in 2018. All of these events are reshaping investments and, while the repatriation is forcing investors to maintain an asset for at least two years to take advantage of the new tax policy, the impending election is leading investors to keep product maturity shorter than one year, as no party is currently dominating the polls. The uncertainty of markets is shortening issuance terms and the appetite for some underlyings as local rates (TIIE) are dropping. There was also a shift in autocallable structures looking for more directional positions.
What are the hidden opportunities and possible pitfalls for banks in Latin America in the structured products business in the coming years?
Manuel Meza Pizá: Structured products are great instruments for gaining exposure to other markets with specific views. So the question is: why is the product not as popular as it should be? We have seen institutional clients in Latin America gaining more familiarity with structured products and the asset allocation of the private banking segment growing. The opportunity is there and we have to work on making investors more confident in the use of products that can add protection, exposure and innovation to the existing portfolios. The problem is usually that the lack of education and information makes structured products look very difficult and risky. Some pitfalls that come to mind are the infrastructure needed to thrive, the need for independent valuations, organised markets, and local issuer frameworks to be in place and supported by issuers, authorities and consumers.