DBS peddling higher yield boosts structured note sales in Europe

[HONG KONG] DBS Group Holdings Ltd, Southeast Asia's largest lender, is expanding its distribution of structured products in Europe as investors there look east for yield.

The bank's European sales increased after it formed an alliance in November with Zurich-based structured products service provider Leonteq AG. Under that arrangement, the Swiss company sells equity structured products on behalf of DBS, according to Calvin Yeap, head of equity derivatives trading at the Singapore-based DBS.

"We saw synergies because there was demand from Europe- based institutional investors in Asian products, especially those from highly rated issuers," Yeap said by phone April 27. "On average, we have doubled the number of transactions every month in Europe in the four months since we signed the partnership."

Investors are hoping to cash in on economic growth in Asia that last year was more than three times expansion in Europe. Equities in China are in the midst of a bull-market rally with the Shanghai Composite Index surging 90 per cent since mid- October while Asia dollar-denominated company notes pay an average yield of 4.01 per cent. Investment-grade corporate euro bonds globally pay 1.02 per cent, Bank of America Merrill Lynch indexes show.

DBS sold S$9 billion of stock-linked notes last year and the notes Leonteq helps distribute currently account for about a quarter of the structured equity derivatives notes DBS issues in Asia and Europe, Mr Yeap said. DBS has an Aa2 credit rating from Moody's Investors Service, the third-highest investment-grade.

The better returns on offer from Asian credits, plus the region's growth prospects, are driving investors out of Europe, according to Pierre Faddoul, the head of Asian credit research at Deutsche Asset & Wealth Management.

"AA corporate ratings are scarcer to find nowadays and Asian credits are still offering a slightly higher, albeit narrowing, return for a similar rating," Singapore-based Mr Faddoul said. "The growth outlook for the region and sound fiscal positions of most Asian countries offer a reassuring macroeconomic backdrop for Asian-based companies."

As quantitative easing continues in Europe, yields in the region will go lower, driving demand for Asian structured notes that offer a "juicy yield kicker," according to Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds GmbH, part of Germany's Union Investment Group that oversees 232 billion euros (US$258 billion) of assets.

"Only highly rated and well-known Asian issuers will get good demand from European investors" because they place a lot of emphasis on the quality of issuers they're investing in, Frankfurt-based Mr Dergachev said. "This trend will persist as long as we have the desperate search for yield in the euro zone."

BLOOMBERG