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EXCLUSIVE: FIRSTRAND INTRODUCES FIRST SELF-ISSUED STRUCTURED NOTE

Middle East & Africa | Industry

11 Oct 2023 by Summer Wang


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The product will be distributed and hedged in-house as the South African bank’s
nascent wealth & investments unit expands its offerings.



First National Bank (FNB) and Rand Merchant Bank (RMB) are the respective
primary distributor and derivative counterparty, both of which are wholly-owned
by FirstRand Bank, the issuer.

> The structured note market in South Africa has grown a lot over the last
> decade led by two to three active issuers - Samukelo Sifiso Zwane

Denominated in rand, the three-year structured note offers 100% capital
protection at maturity, along with exposure to the MSCI World Index through
uncapped participation rate of 110% and the USD/ZAR rate. The minimum ticket is
ZAR100,000 (US$5,300) with a unit price of ZAR10,000.

“The structured note market in South Africa has grown a lot over the last decade
led by two to three active issuers,” Samukelo Sifiso Zwane (pictured), head of
product, wealth and investments at FNB.

“We try to reduce that concentration risk by issuing our own structured notes.
This time we started from scratch and are confident that we will make a dent in
terms of assets under management (AuM) in the structured product space in five
years’ time.”

In 2022, a total of US$7.6 billion structured notes were issued by a group of 15
domestic and foreign players in South Africa, mainly sold to high-net-worth
individuals (HNWIs), approximately 20% of which is ZAR-denominated while the
remaining in hard currency, according to data compiled by a local investment
bank and provided to SRP.  

The issuance volume translated to 2.8% of that in the US retail structured note
market or is 1.8x that for the entire structured note in Thailand during the
year, SRP data shows.

“We've been focusing on building up protection for clients on top of fixed
deposits for the last four years. It started from guaranteed life annuity
followed by guaranteed growth plans and guaranteed income plans,” said Zwane.

“Then we saw the need for clients to be exposed to the market, but with
protection due to high market volatility and increase in frequency of black swan
events.”

FNB has additionally marketed two bespoke USD-denominated autocallable notes
issued and hedged by UBS, which are also linked to the MSCI Word Index. The
autocallable period for these five-year products starts from the third year with
annual observation frequency.

The first product offers 100% capital protection and an indicative return of
5-6% pa. if the final index level is above the initial leave; the second
structure offers 80% capital protection, offers an indicative return of 7-8% pa.
The minimum ticket is US$25,000 with a unit price of US$1,000 for both.

“The MSCI World Index is easy for clients to understand,” said Zwane. “We want
to keep ourselves honest to clients by delivering simple products and will stick
to this philosophy when introducing new structured products going forward –
scheduled around every four months.” 

The oldest South African bank is considering the expansion of its investment
products to cover endowments, a type of structured products for estate planning
purposes that allows clients to select beneficiaries. 

All the three offerings are open for subscription until 27 October with the
strike date set on 10 November. An initial once off fee of three percent will be
charged.

Dual listing

The ZAR-denominated product will be listed on the Johannesburg Stock Exchange
(F100CPZAR) while the other two will be listed on the Swiss Exchange
(CH1286344663, CH1286344671) on the trade date.

Zwane noted that the products are also accessible at FNB’s African subsidiaries
including in Eswatini, Lesotho and Namibia where structured products “are not
commonly available”.

“A total of ZAR100m would be a good start in terms of issuance volume,” said
Zwane.

The products are available for FNB’s private wealth clients with an income of no
less than ZAR1.8m on FNB App or online banking with no brokerage fee, and
through the bank’s portfolio managers and wealth managers or independent
financial advisors.

For the year ended on 30 June, FNB generated ZAR18.2 billion normalised
earnings, up six percent year-on-year, on back of 8.25 million retail customers
and 1.21 million commercial customers.

The earnings represented 73.4% of the total at FirstRand Bank and 1.97 million
out of the retail are classified as private clients who own relative income of
over ZAR450,000, according to FirstRand Bank’s latest annual report.    

For the USD-denominated products, clients at FNB can utilise the bank’s asset
swap capacity free of charge without having to turn to their foreign allowance.

“These is part of the democratisation of investments that we're hoping to
achieve whereby investments become more cost-efficient for clients,” said Zwane.

South Africans over the age of 18 are granted a single discretionary allowance
of up to ZAR1m and foreign investment allowance of up to ZAR10m – a lift from
ZAR4m on a per calendar year basis.

Zwane also highlighted the significance of ensuring FNB’s structured products
fit into its digital platform strategy where third-party structured notes used
to be available.

“Our clients should be able to access these solutions digitally through the app
and other online platforms just like other products,” he said.

To promote the new offerings, a main challenge that Zwane and his team are
facing is the education for FNB’s private wealth clients, which concentrates on
how a structured product works and to how the product fits into their
portfolios.

Zwane added that it is as important for the bank to ensure the distributors are
accredited by the Financial Advisory and Intermediary Services (FAIS),
specifically the CAT1.24 and CAT1.18 across onshore and offshore.



TAGS

UBS South Africa FNB FirstRand Bank
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