Structured Products Weigh on French Banks -- WSJ
Simultaneous dividend cuts at big companies led to trading
By Paul J. Davies and Noemie Bisserbe
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 16, 2020).
France's biggest banks reported substantial trading losses in
recent weeks, highlighting the risks they have accumulated selling
complex investment products promising high returns when markets are
Société Générale SA and BNP Paribas SA both reported roughly
EUR200 million ($216 million) hits to their revenue related to
"structured products" the banks cook up for yield-starved clients.
During good times, these products can generate substantial fee
income for the banks.
But the nature of the coronavirus selloff caught the banks off
guard. Most unexpected: The biggest companies on the stock market
almost simultaneously made deep and broad cuts to their dividends.
Those dividends are a key risk for the banks making those
structured products and the sudden cuts led to hefty losses.
Société Générale and BNP Paribas said a wave of dividend
cancellations by companies as a result of the coronavirus and
increased hedging costs were among the causes of their
The structured-products businesses have been big money earners
for French banks in particular, accounting for almost 40% of total
equities revenue last year, compared with an average of 14% across
the top 10 banks globally, according to research firm Coalition.
The risks associated with having such big structured-products
businesses appear to weigh on how investors view the banks. BNP
Paribas and Société Générale have been among the worst-hit big
European financial stocks, both down more than 50% this year. BNP
Paribas trades for a third of its book value; Société Générale for
15% of its book value. Big U.S. banks by contrast trade closer to
their book value or above.
The main type of structured product that led to the losses at
both Société Générale and BNP Paribas are autocallables. These pay
a bondlike coupon, so long as the underlying stock-market index
they are tied to doesn't rise or fall too much.
French banks are among the biggest creators of these for
mom-and-pop investors and wealthy clients. Sales have boomed in
recent years and they are especially popular in Asia, hitting
nearly $60 billion in South Korea alone last year, according to
Structured Retail Products, a specialist industry publication.
But in March's violent market swings, banks suffered pain in
part because the complicated way in which they try to guard against
potential losses linked to autocallables worked against them.
Autocallables are typically tied to the performance of stocks or
market indexes. If, say, the Euro Stoxx 50 hits a certain level,
the product is "automatically called," meaning the bank repurchases
the security at a stated price and investors get their money
When banks construct autocallables using stock-options markets,
one side effect is an unwanted exposure to corporate dividends,
which creates a new risk on their balance sheets. To eliminate that
risk, the banks sell dividend futures, a type of derivatives
The problem: When stock markets fall and companies cut
dividends, banks have to sell more dividend futures while the value
of these is dropping fast. With big banks all selling heavily at
the same time, the market moves are amplified causing bigger losses
for the banks.
Antoine Deix, equity derivatives strategist at BNP Paribas, said
before the Société Générale or BNP Paribas earnings were published
that heavy selling by banks accelerated the drop in dividend
futures. "When the equity market falls, autocallable structurers
[the banks] need to sell more and more dividends," he said. "The
more rapidly the market is falling, the more difficult it is to do
the hedging those structurers should be doing."
In the Euro Stoxx 50, an index of Europe's biggest companies,
popular in autocallable products, dividend expectations crashed
more than 50% between late February and the start of April.
For investors to lose out on autocallables, stocks need to drop
40% to 50% below where prices were when the product was sold. The
value of the autocallable gets cut down to the low value of stocks
at this so-called "knock-in" level and then investors will get this
lower value back when their bond matures.
Investors may have had a lucky escape in the recent market rout.
The Euro Stoxx 50 dropped more than 38% by mid-March from its late
February peak. But like other global indexes, it rebounded almost
17% after central banks started to support the financial
"If markets had closed the first quarter at their March lows I
suspect a large number of autocallables would have been knocked
in," said Russell Clark, portfolio manager at Horseman Capital.
"But the rally saved them."
--Julie Steinberg contributed to this article.
Write to Paul J. Davies at email@example.com and Noemie
Bisserbe at firstname.lastname@example.org
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May 16, 2020 02:47 ET (06:47 GMT)
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