Best in India - ICICI Bank

A downturn in the fortunes of domestic equity markets has presented a unique opportunity for distributors in India. Investors who had become accustomed to double-digit returns on equity market investments are now worried about the erosion of their capital, which has created an ideal setting for the sale of structured products, says Sreekanta Chatterjee, chief product manager at ICICI Bank. The bank has successfully created structures that can match the traditionally impressive coupons demanded by investors, while addressing concerns over high domestic inflation and rates, as well as stuttering economic growth.

Despite the slowdown, investors still have a strong appetite for exposure to the domestic market, namely the S&P CNX Nifty, which incorporates 50 large-cap Indian stocks. What has given ICICI the edge is the range of capital-guaranteed products it offers linked to the index, tailored to achieve specific returns and payouts and exploit the market regardless of its direction. In one instance, the product offered positive returns when a direct investment would have performed negatively - an essential hedge for wary investors.

The Nifty-linked investment in question was offered between August and September 2007. The 39-month, capital-guaranteed product locked in a coupon of 30% if the index hit 130% of its initial recorded level. Above this figure, investors participated in further rises of the index at a rate of 100%. The product could potentially kick out with an additional rebate of 30% if the index later reached 200% of its level at strike. An equity market rally up until December 2007 meant that investors rapidly locked in their 30% coupon, which was subsequently protected from the sustained decline that began in January 2008 and saw direct investments lose money.

However, competition for business over the past eight months has become more intense as a wave of new participants has arrived in the Indian structured products market. "Most of the new competitors are still just learning the ropes of the game," says Chatterjee, adding that most of the market's new entrants are first-timers. "But at ICICI we have been offering these products to our international private banking clients for a long time. Being on the domestic front is just an extension of what we have been doing in the private banking arena," he explains. As ICICI is the largest private bank in India, it has considerable expertise to offer a large retail audience. "This means we have a wide client base and a huge distribution network," says Chatterjee. Other distributors across Asia confirmed that ICICI was perceived as the foremost domestic bank distributing structured products in the Indian market.

One demand addressed over the past year was for minimum assured coupons, which investors want in the face of equity market uncertainty, says Chatterjee. ICICI recently launched an investment that could offer a minimum level of income and assuage fears over slow economic growth, high inflation, and increasing domestic rates. The product provided 190% participation in any Nifty growth, with a moderate tenor of only 16 months, and again a potential knockout. Investors receive a 20% coupon if the index hits 125% of its strike level on any monthly observation date. "This is for people who are not certain about the future of the Indian economy and don't want to take a directional view at this stage," says Chatterjee. ICICI finds the best value for clients by comparing issuers on pricing once the basic parameters of a product have been defined in-house. Current issuers the bank works with include Citi, Merrill Lynch, ABN Amro and, to a lesser extent, Deutsche Bank and Barclays.

Jitters about market uncertainty also mean that investors are wary of longer-tenors. This is why the third of the bank's Nifty-linked capital-protected structures offered a short tenor with a non-directional emphasis. A range product using a short straddle structure, it offered investors a coupon of 12%, or 150% participation in Nifty growth, whichever is greater, provided that the index remains in the range of 80-130% of its initial value. If it falls out of range but remains above 60%, the final payout will be 14%. This was targeted at investors who wanted a fixed minimum coupon, and allows them to benefit from bear conditions.

Concerns over tenor can also be addressed by providing as liquid a secondary market as is reasonably possible. The distributor acts as a conduit between investor and issuer in the event that investors wish to redeem the product early. "We approach the issuer and facilitate the transaction in terms of bringing the issuer and the client together, ensuring that if they want to get out of the investment then we can offer an exit route," says Chatterjee.