Company profile: KBC

25/06/2004

The following article was written by the UK based website StructuredRetailProducts.com and provides an interesting insight into overseas markets.

StructuredRetailProducts.com
Not only has KBC Asset Management been selling structured products in Belgium since 1993, but it still has much of the same team in place. Head of structured products Wim Allegaert remembers the first time: "It was a simple cliquet product (which has since been optimised into best of, reverses, digitals…). You could count on one hand the banks willing to price this kind of risk."

The asset manager has since sold €25bn of structured products and now has, at 53% of total Belgian sales, a much larger presence in structured products than its overall asset management market share of 31%. Allegaert believes is has achieved this feat by starting from the proposition that structured products should be the keystone of every investment portfolio. The questions therefore are how do you structure products to meet that requirement, how do you maximise your relationships with the distribution force, and how do you continue to expand your distribution once the Belgian market has matured?

To answer the last question first, KBC's holding company has crossed the borders into central and eastern Europe, buying dominant local banks and insurance companies, which has enabled KBC to copy its domestic success in markets offering relatively modest volumes, but massive growth. Allegaert estimates that €5bn worth of structured product has been sold in Eastern Europe in the last two years. KBC sells the biggest volumes in the Czech Republic . Hungary and Poland follow closely behind, says Allegaert, and the Slovak Republic and Slovenia are just coming on-stream. A typical tranche in Poland might raise €25-30m.

The twin concepts of 'simplicity' and 'comfort' are key to the operation. Whatever the complexity of the assets backing the product, the customer proposition should be explicable in two sentences, says Allegaert. "Don't forget, ten years ago the people selling these products were living in a very rigid political system, and have had to make the transition to commercial sales talk. The product has to be easy. Also there has to be the comfort provided by a guarantee of capital return."

The basic building blocks for local products are familiar: a link to mature western markets and a minimum return to heighten comfort, and some exposure to equity market upside. Terms are also much shorter than they might typically be elsewhere, at two or three years and four years at the longer end.

All KBC's Eastern Europe products are based on the Eurostoxx and hedged back into local currency. "This is highly beneficial, because the interest rate differential between the Hungarian forint and the euro is material," says Allegaert. It enables a higher participation in the growth of the linked asset.

Keeping the home fires burning
KBC has only been able to achieve this level of success because it is on such solid footing in its home market. Regular issuance is important in Belgium , and KBC ensures it has four or five products on offer at any one time. It also treats its (largely tied) sales force, rather than the end purchaser, as the client, and ensures that it is highly educated in the subject matter. Allegaert is acutely aware that he has to have a proposition that is simple for them to sell, while also maintaining a high degree of innovation and diversity in his offering. "If they are not with us, we have a problem," he says.

Asia has overtaken Europe as the centre of innovation for structured products, but they are so focussed on the new, says Allegaert, that they don't always ask questions about where it fits in the portfolio. In Belgium , on the other hand, "The point of departure is that people care more about the return of their money than the return on their money." He says. "We hated reverse convertibles, so we transformed them into a structure where the return is at risk, rather than the capital. Then we looked at the maturity of these products –the capital is guaranteed over a year and half so that the opportunity cost is not so great."

Its best-selling product so far, though, is Maxisafe, which it launched last year and of which it has sold €2bn so far. Maxisafe is a long-term, capital-secure interest rate-linked product, paying annually the higher of 4% or the long-term rate. Allegaert says the product stands up because it is able to hedge away duration risk and because has a good relationship between risk and reward.

Allegaert is also proud of having developed among the first 'best-of' cliquet products. "Although the structuring is complex, they are a very logical proposition, which people could appreciate," he says.

Like product designers everywhere, Allegaert is please that interest rates are making product design easier now (even if volatility has increased) and enabling the market to branch out from the variable maturity cliquet products currently popular. Two years ago there was a fixed maturity but the return was uncertain; now it is the other ways around. But, he says. "If the market gets stuck in the doldrums you have to wait eight years to get your fixed return, and then you might not get it at all."

KBC also pioneered shorter maturities, and it has done products on forex and credit, as well as more usual stock indices. It would like to do hedge fund products too, but Allegaert cannot get beyond two problems. "First, you have to say that a good long/short fund should not need capital protection in the first place," he says, "So you think, OK, if volatility is so low that should make protection cheap. But that's the second problem. It is being sold too expensive for what you get." Banks may argue about lack of liquidity, but Allegaert is certain that doesn't account for all of the premium in the price.

Allegaert recently quoted in a conference speech a Morgan Stanley report estimating the size of the European structured products market at $400bn in 2002, with growth estimated at 8% a year until 2006. Belgium may be a small country, but you can bet that at least one of its asset managers has its eye on a healthy chunk of that.