Pole position

On the back of strong domestic growth, Poland's structured products market is proving to be an unlikely success story. Daniel Sheehan speaks with BPH and KBC – two banks that are pushing the benefits of derivatives-based investments in the country – and asks if other central and eastern European markets can follow suit

Poland has emerged as one of the Europe's fastest-growing economies since its accession into the European Union in 2004. Polish gross domestic product grew at 5.5% in 2006, with growth of more than 5% predicted for this year. And while many markets in central and eastern Europe are still coming to grips with derivatives-based investments, Polish investors are starting to invest in a wide range of structures. In fact, the Polish structured product market experienced something of a surge in 2006 and experienced growth in both the retail and private bank segments. Belgian bank KBC and Polish bank BPH estimate that issue volumes in 2006 amounted to around E2 billion – all this from a market that was virtually unheard of four years ago.

It seems that the much-debated migration of Polish workers to other EU member states – most notably the UK – has had an unpredicted effect on the structured products market. "A lot of the income that is coming back into Poland has been earned in other EU countries, and that income is being invested by the families that remain," says Philippe De Brouwer, Warsaw-based chief executive of KBC Poland. Structured products are one of the investment options now being taken up by these investors, he adds.

Homegrown success story

Jacek Jurczynski, from the treasury sales department at BPH in Warsaw, agrees that the savings level in Poland is the key driver behind the growth in sales of derivatives-based investments. "The level of saving in Poland has increased from being one of the lowest in Europe to above average," Jurczynski says, adding that savings have been directed first towards funds and now structured products. "Due to the poor performance of investment funds recently, we feel that investors will be turning increasingly to structured products," he says.

BPH is the third-largest bank in Poland in terms of market capitalisation, and it has been aggressively building its structured products business since it started in 2004. "Our structured products business exploded this year in terms of volume and we strongly believe it is the beginning of a major trend," Jurczynski says. The bank's early start and investment in developing its own structuring technology enabled it to become the leading distributor in Poland, he claims. "The past 12 months have been an exciting experience. We knew that the market had potential, but we were surprised by the level of investment," he says.

BPH began structuring FX-linked products in 2004 after its market research showed healthy demand for this underlying. During the past two and a half years, the bank has continued to add new underlyings to its product platform. In the year 12 months to November 2006, BPH issued E531 million of structured products across underlyings including fixed income, FX, equity and commodities. Its most popular product, which sold E76 million, was a commodity structure. Issued in June, the product was linked to a basket of commodities with a two-and-a-half-year maturity and was available in Polish zloty. A version of the product was also offered in euros and US dollars.

In equities, the bank's most successful product was a three-year note linked to a basket of Asian stocks. One tranche sold E61 million. Asian equity was a popular underlying for BPH, with nine Asian equity-linked notes raising E178 million. The bank also continued to do strong business in FX, releasing seven FX-linked structures in 2006.

For a bank that operates in what is still a new market, its range of products is unusually diverse. "With each issue we try to offer more complex products and to introduce new product types, both in terms of the underlying asset classes and coupon construction," Jurczynski explains.

As is increasingly the case throughout Europe, the underlying in Poland is far more important than the structure or wrapper. "Theme- or macro-based products are very compelling to customers – indeed the story or idea behind the products are much more important than the coupon construction," Jurczynski says. BPH is planning to add to its range by developing more products. The bank is currently working on implementing hedge funds and hybrid products and would like to offer products with early redemption and with longer maturities.

Transparency for the investor is one of BPH's key concerns. For each of its issues, the bank produces standard materials such as a prospectus, market research, term sheets, back-testing data, and information about potential risks as well as benefits. "We include three market scenarios for every issue – negative, neutral and positive, so the customer has a better understanding of what we can expect in the future depending on market development," Jurczynski says. BPH does the majority of its structuring in house.

Joining the fray

Another major player in Poland is KBC, which has been selling structured products there since 2003. KBC's De Brouwer says the Polish structured products market has become much more competitive. "When we entered the market, KBC had the field to itself but since then we have seen the arrival of a lot of new competitors," he says. The bank has managed to increase its volumes 30% year on year, despite this increased competition, he claims. "We sold E1 billion of structured products in 2006 and expect that figure to be significantly higher in 2007," he adds. KBC is confident that the market will grow strongly in 2007. "We will release a new product to market every one and a half months," he says.

KBC, BPH and other key players, such as ING Bank Slaski and Millenium, have now been joined in the market by global heavyweights Deutsche Bank and Citigroup.

Poland's success with structured products has been noted by its neighbours, and issuance is on the increase throughout central and eastern Europe. Across Poland's northern border in Slovakia, for example, Austria's Bank Erste's structured products business expanded from E15.8 million in 2005 to E105.8 million in 2006. Erste also recorded strong growth in Hungary, with sales up from E121 million to E168 million. Growth in terms of number of issuers and volume is also up in other nations in the central and eastern European region, including the Czech Republic, Croatia, Serbia and the Ukraine.

According to BPH, participants in other countries are looking to Poland for clues on how to increase sales of structured products. The bank has recently held discussions with retail banks in Kazakhstan that are planning to set up a structured products distribution network, Jurczynski says, and BPH has similar plans for Russian retail banks early this year. "The Polish example is now being emulated across central and eastern Europe," he says. With the additional growth predicted for this year, the Polish model certainly seems one that is worth copying. n