SG completes structured products de-risking ahead of schedule

IFR 2388 - 19 Jun 2021 - 25 Jun 2021
5 min read
Christopher Whittall

Buoyant markets during the latter part of last year and early 2021 helped Societe Generale complete the de-risking of its equity structured products books several quarters ahead of schedule, according to a senior executive at the bank.

SG sought to significantly reduce its presence in some of the more complex types of structured products that it packages and sells to wealthy investors after it was one of a handful of French banks to suffer heavy trading losses in the first half of 2020 related to these exposures.

Most of the positions SG had looked to offload came in the format of autocallable products – a structure that became extremely popular with Asian and European investors over the past decade. Autocallables are so called because they automatically redeem and pay the investor a coupon if a particular stock index or group of shares is trading at or above a pre-agreed level on a certain date.

The rally in stock markets since SG began the process of de-risking its structured books last year triggered this autocall feature on large numbers of products, helping the bank to reduce its existing stock well ahead of expectations.

"Conducive market conditions towards the end of 2020 and early 2021 allowed us to go faster in the pace of the de-risking of our books and finalise this process far ahead of our original ambitions,” said Yann Garnier, global head of sales at SG.

SG reported €200m in structured products losses in the first quarter of last year, as companies cancelling dividends and a surge in market volatility as a result of the global pandemic wreaked havoc on its positions. That episode forced the French bank to rethink this core business.

SG subsequently said it planned to reduce its risk tolerance to the most complex autocallables by 50%. That would cost the bank as much as €250m in annual revenues, it said, but would halve the size of its losses during stressed markets. SG also launched a “new generation” of structured products in the second half of the year as it looked to maintain its prominent position in this space.

There is little evidence so far that the bank’s equities revamp has diminished its ability to make money in what has historically been one of its most important sources of revenues.

SG reported its best quarter for equities since 2015 in the first three months of the year, with revenues of €851m. That marked an increase of 28% over the first quarter of 2019 and was €700m more than during the first half of last year when it suffered the structured products losses.

The bank highlighted "good performance" in structured products in its first-quarter earnings, while executives also noted that market conditions were particularly favourable during this period.

“The re-balancing of our business mix across flow and listed retail products, prime services and delta one solutions, combined with innovation around new products launched in the course of 2020 in the investment solutions space, allowed us to report a solid first quarter in equities," Garnier said.

Structured revamp

SG's decision to cut back in equities last year contrasted with a more expansive strategy laid out by long-time rival BNP Paribas after it too suffered large structured products losses. Still, SG's decision to remain heavily focused on structured products should come as no surprise given how important this business has been for its trading division over the years.

“Prior to the first half of last year, the equities business [at SG] had been remarkably stable in terms of revenues. Within the business the [return on equity] drag has come from the flow side rather than structured products,” said Omar Fall, a banking analyst at Barclays.

Garnier noted that SG's strategy is to focus on the “high-end part of the value chain” in equities. "Our goal is to keep our leadership position on equity investment solutions while maintaining a diversified business mix that is equally weighted towards investment products, secured financing and clearing, and indexation and flow solutions," said Garnier.

"The franchise is definitely more diversified and stronger than in the past," he added.

SG is aiming to have a more balanced offering in terms of product set within investment solutions. That includes so-called decrement indices, custom-built indices with an ESG focus, quantitative investment strategies, as well as more flow products such as actively-manged certificates.

"We are focusing on the next generation of structured products,” said Garnier, adding "we have had very good feedback from clients” since the bank launched its revamped offering last year.