Caution sees ‘bells and whistles’ products wane

Caution sees ‘bells and whistles’ products wane
By Robert Cookson

Published: May 9 2010 18:29 | Last updated: May 11 2010 18:39

More than a year has passed since the collapse of Lehman Brothers in September 2008, but shockwaves from its demise are still reverberating through the world of retail structured products in Asia.

Investors across the region – in particular those in Hong Kong and Singapore – lost billions of dollars they had invested in complex structured products linked to the failed US investment bank.

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But even now, the local branches of some global financial groups are regularly picketed by investors carrying placards emblazoned with “devil bank” or similar slogans.

The protests, lawsuits, and compensation awards are the most visible signs of the turmoil that has ransacked Asia’s structured products industry over the past two years.

Behind the scenes, industry sources estimate that sales volumes in Asia have collapsed to about a quarter of the $250bn seen during 2007.

Investors have become much more cautious about what products they buy, while regulators in Hong Kong and Singapore have clamped down on the sales practices of distributors. As a result, the most complex products – the most lucrative for banks – have disappeared from the market.

“People are much more careful now,” says Peter Chan, chairman of the Alliance of Lehman Brothers Victims. “It’s much more difficult for banks to sell these kinds of products.”

Before the financial crisis, one banker explains, Asian investors were sold products with “all sorts of bells and whistles”.

Take the final series of Lehman minibonds. Investors who bought them in effect put up cash to underwrite credit default swaps on a bundle of senior and subordinated debt from blue-chips including HSBC, Hutchison Whampoa and Standard Chartered.

Other products that were popular during the boom years included structured notes that were linked to property indices or complex baskets of stocks based on themes such as healthcare or water.

“Nowadays, the products are getting much simpler and clients want products that are easy to understand,” says Min Park, Asia head of equity derivatives and convertibles at Credit Suisse.

Credit Suisse is one of several investment banks that create “white label” structured products for intermediaries, such as private banks, which sell them on to the end investors.

Industry sources say profits in this part of the industry have collapsed – due to the double whammy of low volumes and low margins on simple products. Some groups only keep their operations alive to maintain client relationships and in the hope that volumes will bounce back.

Yet there are some signs of hope for the industry.

“Since the second quarter of last year volumes have started to recover in certain markets, especially in Japan and Korea,” says Mr Park.

In Korea, total volumes tumbled 70 per cent in 2008, Mr Park estimates. Since then activity has picked up, he says, and volumes are now only 30 to 50 per cent below their 2007 peak.

Big markets such as Hong Kong and Singapore remain depressed, especially in the retail segment. In Taiwan, too, volumes are down an estimated 80 to 90 per cent from the 2007 peak after the local regulator clamped down on the market.

Volumes are recovering, especially in the private banking industry, says Thomas Fang, acting co-head of risk management products in Asia for UBS.

“Coming into 2010, clients [intermediary banks] are more positive, projecting growth for their business of anywhere between 20 to 50 per cent, depending on their client segment and region,” Mr Fang says.

The most popular products these days are ones that are liquid, transparent and simple – including warrants, exchange traded funds (ETFs), and other listed products. In terms of over-the-counter products, clients are looking for simpler structures and shorter tenors than they were in 2007.

For example, in Hong Kong’s private banking industry about 60 per cent of total structured product volumes are now comprised of equity-linked notes (ELNs) with a maturity of one month, according to one person.

Industry executives expect products will again become more complex over time and volumes will continue to rise.

“Investors have a genuine need for structured solutions,” says Mr Fang.