(Bloomberg) — French investment bank Natixis SA is beginning a fresh push into the complex derivatives that blew up twice in recent years, causing hundreds of millions of euros in losses and helping end the tenure of the lender’s former chief executive officer.
The Paris-based bank plans to sell a new batch of so-called autocallables, which are volatile derivatives linked to stocks, people familiar with the matter said. They include products similar to those Natixis suspended after they lost 259 million euros ($303 million) in 2018, the people said. The firm will also offer a product that carries less risk tied to dividend changes after the bank lost at least 250 million euros last year when many companies slashed their payouts, the people said.
Natixis Chief Executive Officer Nicolas Namias, who replaced Francois Riahi in 2020 and oversaw the bank’s takeover by majority shareholder Groupe BPCE last month, is trying to boost revenue after years of losses on esoteric trades and other problems with risk management. The autocallables could help the CEO in his bid to add at least 500 million euros to investment-banking income by 2024.
“Natixis, to the new management’s credit, may see some value in re-entering a market that has been left with few market players,” said Gildas Surry, who helps to oversee about $2.2 billion at Axiom Alternative Investments, including Natixis and BPCE debt. “It still offers an array of opportunities to grow the revenues in a disciplined way.”
But Namias is also trying to improve risk controls. Natixis announced an overhaul of the bank’s approach to equity derivatives — including autocallables — in November 2020, several months after he became CEO. The bank said it planned to exit the most complex products and tighten its exposure to ongoing trades while only selling them to retail customers of BPCE and “selected strategic clients.”
“Natixis continues to implement the strategy announced in November 2020,” Sonia Dilouya, a spokeswoman for the bank in Paris, said in an emailed statement. She declined to comment on specific trades.
Autocallables are multilayered securities that are popular in Japan and Korea because of their returns. Buyers tend to get a steep bond-like coupon that’s linked to gains in equities markets. If the stocks climb past a set point, the product is automatically called, or redeemed, and they get their money back plus interest. The shares often have to fall substantially before investors lose any money.
Yet while the trades can be lucrative for the banks that arrange them, their complexity makes them fraught with danger. Riahi found this out to his cost in 2018, when autocallables the bank had been selling in Korea imploded after a decline in the country’s stock market. The losses were later scrutinized by the European Central Bank and the firm halted sales of the product.
Natixis officials now want to resume selling those products to Asian clients, the people said. Known as “multi stepdowns,” these trades are typically linked to multiple baskets of shares while the point at which they are called changes frequently. This makes them difficult to manage, according to Eric Barthe, head of financial engineering at Anova Partners AG in Zurich.
“Those products are not specifically attractive to banks in terms of risk,” said Barthe.
The other trade that Natixis officials are mulling is a “fixed dividend” autocallable, the people said. These are linked to stock indexes but are structured to remove the risk of losses for banks when corporations suddenly cut or cancel their dividends, according to Barthe. This happened last year amid the spread of Covid-19, upending portfolios of autocallables at Natixis and Paris-based rivals BNP Paribas SA and Societe Generale SA and costing them hundreds of millions of dollars.
“Management has changed,” said Surry, the Axiom portfolio manager. “The new one may have a stronger experience and understanding of the complexity of these products.”
(Updates with investor comments in fourth and final paragraphs)
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