Want to invest your money? This interesting article provides you with the necessary information about structured deposits : their meaning, function, importance, and more. Learn the details!
Structured deposits
A structured deposit turns out to be the combination of a traditional bank deposit and an underlying asset. This kind of deposit is also known in the financial world as a reference deposit.
Structured deposits were designed for clients who wish to invest capital in order to obtain a higher return than that offered by fixed-term deposits. In addition, they do not want to put their money at risk and have the possibility of doing without it for a certain period of time.
Once an investor chooses this type of banking instrument, the return on their capital is linked to the performance of a stock market index or basket of shares from one or more companies. If you would like to learn more about indices, we invite you to follow the link below titled Investing in Indices.
How Structured Deposits Work
Structured deposits always work the same way and it's very simple. Its operation is explained in detail below: Initially, the client must invest an amount of money in the bank of their choice for a period agreed between the parties, generally between three and six years.
Upon reaching the expiration date agreed between the investor and the bank, if the reference shares have met the conditions established in the contract, the bank will pay the investor the remuneration offered.
Otherwise, if the return is minimal, the interest received will be few and sometimes even 0%. The return offered by a structured deposit is variable, because it is linked to the behavior or performance of the stock market indices.
So that we can understand more clearly how structured deposits work, take a look at the following example: A client goes to the bank to contract a structured deposit linked to the shares of the stock market index with a term of one year. Depending on the conditions of the product, the final remuneration of the deposit is variable and is subject to the behavior of the underlying assets, in this case the stock market index. The following formula is applied:
- If at the final maturity date the price of both shares is equal to or greater than the initial price, the bank will cancel interest of 3%, for example, on the capital invested. It is important to verify if the profitability is expressed in the form of a coupon (total interest), a Nominal Interest Rate (TIN) or an Annual Equivalent Rate (APR).
- If, on the other hand, the final price of the shares is lower than the initial price, the financial institution will pay 1% interest. Sometimes structured deposits can have a minimum return of 0%, that is, if the underlying assets do not evolve favorably, the remuneration will be nil.
Aspects about structured deposits
Before deciding on this banking instrument, you need to know other important details. Here we discuss it.
1.-Financial terms are complex and many people hesitate to make bank contracts because they do not understand exactly what the conditions of the negotiation are, therefore, it is essential that we are clear about what they mean:
underlying assets
They are assets whose behavior will define the final profitability of the deposit. It is generally a stock index, company shares, currency value, among others. The client signs a contract in which the conditions of the deposit are established, among them are that the benefits will be subject to the evolution of this asset.
Initial observation date
In order to calculate the final return, the first thing to do is set an initial date to observe the underlying assets on which the initial reference price will be established.
End observation date
This aspect refers to the date on which the final value of the underlying assets to which the structured deposit is linked is established. In order to calculate the final return and the interest that the client will receive, the initial observation level is compared with the final observation date.
Term
It is the established time that the investment will last. Normally structured deposits are medium or long term, not less than 12 months.
Characteristics of structured deposits
- They are tied to one or more underlying assets. These assets are established by the banking entity that promotes the structured deposit offered.
- variable return. As we have mentioned, structured deposits allow a higher percentage of profitability to be obtained than traditional fixed-term deposits. However, the final remuneration depends on the performance of the underlying assets. It is not possible to know in advance the profitability offered by structured deposits. The banking entities indicate to the client the percentage of maximum remuneration that can be reached, but it does not always correspond to reality.
- The investment capital is guaranteed.
- Liquidity is not total: This aspect is very important for you to know because if you need to recover the invested capital before the expiration date agreed with the bank, you will be subject to a penalty.
- Structured deposits have a higher degree of complexity due to profitability. As has already been explained, if the client does not have financial knowledge, is unaware of the behavior of the stock market or of the other products to which his capital could be linked in structured deposits, he will not be able to assess whether this type of instrument banking adapts to your needs.
Advantages and disadvantages of structured deposits
It is natural and logical that before choosing a financial investment instrument you should analyze the advantages and disadvantages of each one. Now it is our turn to detail these important concepts.
Advantages
- Maximum guarantee: the capital invested has no risk. You might think: what happens to your money if the bank goes bankrupt? You don't have to worry because your money is protected until the expiration date by the Deposit Guarantee Fund (FGD).
- Profitability potential: What does this statement mean? It means that if the behavior of the underlying assets progresses satisfactorily, the benefit in percentage of interest in favor of the investor will be very favorable. They are taxed by brackets: The profits obtained will pay taxes equally Tax authorities. There are different tax rates and they are applied to each section of the amount to be declared, starting with 19% for the first 6000 euros, continuing with 21% up to 50000 and reaching 23% up to 100000. Thus, you always pay less.
- The bank is responsible for making the payment of taxes to the Treasury, it means that the interest remains entirely for the client
Disadvantages
- In this aspect we must bear in mind that one of the main disadvantages is the lack of liquidity, which means that the capital invested is not available to be withdrawn at the request of the investor and must wait until the expiration date.
- Another disadvantage is that the investor does not know the profitability of the money invested until the end of the previously established term.
- The percentage return is limited, that is, even if the underlying assets have increased in excellent proportions, you will only receive the agreed interest and sometimes, unfortunately, it is minimal and sometimes nil.
Keys to understand structured deposits
As we have mentioned, structured or referenced deposits are intended to potentiate the capital invested. Below we will detail the tips you need to better understand this banking instrument.
Investment
When contracting a structured deposit, it is necessary for the client to make a capital contribution. The banking entities establish the minimum and maximum amounts to carry out the contracting.
Structured Deposit Cancellation
On many occasions we ask ourselves, can the structured deposit be canceled in advance? Most banks do not allow it. The client must take into account that his money will be out of his reach for the period of time previously established in the contract. There are exceptions and in some cases they can be canceled, but the capital is usually guaranteed at maturity, so if the deposit is canceled before it will be sold at the market price and you could end up losing money.
Is there a maximum or minimum guaranteed return?
In the referenced deposits there is a maximum return that is obtained depending on the evolution of the assets. If the behavior of the assets is favorable and a minimum in the opposite case.
The profitability of our structured When is it received?
In this type of banking instrument, the interest generated is paid on the maturity date of the product, unless a partial payment of the interest generated has been foreseen in the initial contract. However, in most cases, interest is paid at the end of the contract, although it can also be paid annually.
When does the subscription period end?
The subscription or contracting period for structured deposits has a limited date due to their condition as referenced or linked to underlying assets. This subscription period ends before the date established for the valuation of the indices defined by the bank.
What is the initial amount to make the investment?
As usual in all bank deposits, it is necessary for the investor to make a minimum capital contribution. The amount is established by the bank, and can range from several hundred euros to several thousand. Similarly, it is important to know that the bank determines the maximum amount that can be invested in the product.
- Structured deposit vs fixed-term deposit: The best option
Other details of interest that you should consider before deciding which is the best banking instrument that suits your needs, below we are going to offer you a comparison between fixed-term deposits and structured deposits. Let's analyze!
Difference in profitability
In this sense, fixed-term deposits offer precise information from the beginning of the contract, that is, you know in advance the percentage of interest that you will receive once the established term has expired, not so in structured deposits, since they are linked or referenced to underlying assets, depend on the behavior of the assets
The profitability is not fixed, nor will you know at the time of contracting the interest percentage that will be generated after the period of time that the contract lasts.
Protection of the Deposit Guarantee Fund
both fixed-term and structured deposits are protected by the Deposit Guarantee Fund (FGD).
Term
Early cancellation: this is a very significant difference. We explain: fixed-term deposits can be canceled in advance, of course, a percentage of interest is lost. On the other hand, in structured deposits they cannot be canceled.
Control of structured deposits
The control process refers to the set of actions with tax purposes to achieve the timely payment of taxes. In the case of structured bank deposits, as well as other deposits, they are subject to the payment of taxes.
How much will you have to pay the Treasury for the profits received?
The profits received from the contracting of this type of product are calculated using the tax rate, since 2016 it is established that it will be between 19% and 23%. Withholding is done automatically at first 19%
Now, if the profits obtained exceed the first tranche, when it is up to the investor to make his tax return, he must resolve the situation, considering the percentage of profits received.
How is the calculation made to know how much I will have to pay to the Treasury?
Very simple, you just have to proceed to carry out a mathematical operation, we must subtract from the gross interest the percentage corresponding to the tax scale that we presented above.
Let's illustrate with an example to make it clearer: An investor contributes the initial capital of 20.000 euros, he obtains 600 euros for gross interest. How much interest will you eventually receive? 486 euros, since the Treasury would take 114 euros, which represents 19% of the profits.
Pre-contractual information
We continue to provide general guidance on structured deposits. In this section of the article we are going to dwell on the information that the saver must receive from the bank prior to contracting the structured deposit.
- The bank assumes the commitment to repay the capital plus the interest generated according to the behavior of the underlying assets (shares of one or several companies, stock market index, currencies and others) at the maturity date.
- Explain in great detail the conditions and risks on which your profitability will depend, including an estimate of your APR.
- The procedure that will be applied to calculate the payment of taxes to the Treasury.
Content of the contract
The contract must be very specific and before signing you must pay close attention to the fine print, this way you will avoid uncomfortable surprises at the end of the investment term. Must contain:
- Examples of how the remuneration of the deposit will work, as well as the penalty costs if you had to cancel it, although as already mentioned, structured deposits do not have early cancellation.
- Detailed explanation of the profitability, which is subject to the stock market, therefore it is variable, it could be higher or lower once the financial operation is completed.
Types of structured products
There are various types of structured products, they are classified taking into account various referential variables that will be used with pedagogical criteria, to facilitate a better understanding and usefulness of the different typologies. Considering the level based on maturity:
Structured products with capital guarantee at maturity
Its predominant characteristic feature consists of the return of the total (100%) of the invested capital on the due date. Under this modality, the rules of the game or governing regulations are defined by the Bank of Spain and its coverage is guaranteed by the Deposit Guarantee Fund.
Risk structured products
This type of deposit does not have capital guarantees at maturity, its profitability will be subject to the dynamics of the underlying asset. This type is represented by the National Securities Market Commission (CNMV).
According to the format used for the initial moment of issuance of the financial product, we find the following:
- Structured deposits: Guarantees the capital at maturity.
- Money: It has variety in terms of warranty.
- Note or Structured Bond: with or without capital guarantee at maturity
- Financial Contract: It has a high capital risk at maturity.
Parts of the investment of deposits
Structured deposits are currently widely marketed by banks and some savings banks.
They are shown as a financial operation that divides the investment provided by the investor into two parts. Below we offer you the details.
The first part of the capital pays a fixed, attractive interest, which can reach 12% in a period of 3 months. As you can see, it works like a fixed-term deposit.
The second part of the invested capital has a longer maturity term and the return will be variable depending on the behavior of the underlying asset. Earnings received will be high if shares increase and will drop if shares decline.
Projection of structured deposits
There are many banking entities that are promoting structured deposits as a good investment. Let's see below what the main banks offer.
Banco Sabadell promoted two new structured deposits. These are the Eurostoxx Up 18 III Deposit and the Triple Opportunity Deposit. The initial investment is €600, offering interest of up to 4% APR. They highly recommend the Triple Chance Deposit because the profit percentage is higher.
This deposit is subject to the evolution of two large underlying assets: Nothing more and nothing less than the shares on the stock market of Telefónica and Banco Bilbao Vizcaya Argentaria. (BBVA). As for the capital, it is 100% guaranteed.
For their part, BBVA and Santander offer structured deposits anchored to the shares of different companies. It has the following characteristics: The maturity term is 4 years, the interest is fixed for a certain time, generally the first 3 months, the rest of the time (9 months) are linked to the behavior of the shares of the companies selected by the banks .
These entities present a financial instrument for exclusive clients. Banco Santander asks the investor for a minimum initial capital of 10.000 euros and BBVA 20.000 euros to contract the deposit.
In both entities the maturity term is 4 years. At the beginning of the operation, the percentage to accrue for interest is low, later that profit margin will be linked to the evolution of the shares. Remember that, as has been stated throughout this article, it is a characteristic of this type of financial instrument.
Continuing with the offers promoted by the banks, it is now necessary to detail those implemented by Banco Popular.
Banco Popular offers its product called Double Growth Deposit. This structured deposit is anchored to the performance of the Spanish Ibex-35 index. It offers a fixed return of 12% APR for the first three months, then the return will depend on the underlying file (the following 18 months). To calculate the percentage of interest that the investor will receive at the end of the contract, the following scheme will be used: if the index increases more than 1,25%, the investor will obtain 22,5% of accumulated interest. If the index falls every month, interest will be minimal and sometimes up to 0%.
Another product that Banco Popular is offering is the Deposit 10 Ibex-Euro Stoxx. It offers 10% APR for the first month of the investment. The following months, it will be adjusted to the increase in the underlying assets, selecting the index with the best performance between the Ibex-35 and the Euro Stoxx.
Making use of technological advances, other entities are innovating online banking. Thus we find Openbank, a subsidiary of Banco Santander. This bank is offering its customers a product called Super 8. Do you want to know its features? It is a structured deposit with a maturity period of three months whose return is 8% APR (hence its name). The additional return of at least six months will be calculated considering the underlying assets of the investment funds selected by the entity.
Likewise, Bankinter held the Société Générale–Total SA 2017 Deposit in 17.1. This deposit is subject to the shares of the French companies that give it its name and function as the underlying assets that will indicate the final return at the end of the term.
The client must make a minimum initial contribution of 1.000 euros. The contracting period of the financial operation is two years and three days. At the beginning of the deposit, a price is placed for each share of the two companies. When the final observation date arrives, a comparison is established to calculate the accrued interest.
Another banking instrument offered by Barking is called: Digital Guaranteed 35. Its characteristics are as follows: it is subject to the actions of the companies Iberdrola and Acerinox. Interest is calculated according to the following scheme: in the event that the shares maintain or increase their value in the final observation period with respect to the initial observation, the return will be 1,10%. Otherwise, the coupon will be 0,10% APR.
In the following graph you can see the percentages of interest in this Barking proposal.
Catalunya Caixa: This banking entity has offered its clients a variety of structured deposits since its inception. In past times, it offered these banking instruments linked to some recognized companies, namely: Inditex, Carrefour, Kia, McDonald's and Hace.
The profit margin is already known: in the event that all the shares exceed the initial level, the investment will be returned in full, that is, 100%. Additional will grant a 5% coupon. If the contract is extended for another year, 10% will be contributed if the condition is met.
If the condition is fulfilled after two years, the coupon will become 15%, and if at that date all the shares do not exceed the initial value, the contractual operation is terminated and only the invested capital will be returned.
We continue to show the offers offered by banks. Corresponds to Banco Madrid. This bank offers a structured deposit linked to Iberdrola shares, guarantees 100% of the investment at maturity, and also proposes a coupon of 5,5% per year that elapses before the condition is met, similar to the previous one. We explain in detail:
- After 12 months the value of Iberdrola exceeds the initial value, we obtain a coupon of 5,5%.
- After 24 months, if the value of Iberdrola exceeds the initial value, the coupon percentage will be 11%.
- More than 5 years in which the coupon would be 27,5%, or else the deposit would be canceled
As you can see, there is a range of structured deposits offered by the market so that you can choose the one that suits you best.
Nominal Interest Rate (TIN) and Annual Equivalent Rate (TAN)
Throughout this article we have seen the acronyms TIN and TAE. We are going to explain their meaning and how they influence the calculation of interest on structured deposits.
We will begin by saying that the acronym TIN refers to the Annual Interest Rate and corresponds to the fixed percentage (%) that is stipulated for the payment of money as a loan. For its part, APR is the Annual Equivalent Rate and refers to the interest that indicates the performance of a product, that is, the interest generated at the end of the period of time established in the contract.
Structured deposits use the reference APR for calculating return interest, however, it should not be confused with coupons.
It is very important to emphasize the difference between one another. The coupon is the final return, meaning that it corresponds to the percentage that will be obtained on the money invested
While the APR corresponds to the net annual value and acts as a reference value to compare various types of deposits marketed by banks.
We will explain by means of an example. The client contracts a structured deposit with a term of three years and a 5% coupon. Interest to be paid at maturity will be 2,5% per annum. The initial contribution is 20.000 euros. After the banking operation, you will receive 100 euros, equivalent to the percentage offered in the coupon. In this way, the annual return, that is, the TIN will be 2,5% and the APR 2,48%.
final recommendations
To conclude, we must say that not everything is rosy in this type of banking operation, therefore, we are going to allow ourselves to make a final summary of the risks to which you are exposed if you decide to contract a structured deposit.
Remember that it is a product with a margin of complexity and risk since you can earn on your investment but you can also lose, since its profitability is variable because it is subject to a basket of shares of certain companies or investment funds. All the investment will depend on the index of the underlying assets, in this way it is possible to obtain greater profitability, as well as the risk of obtaining 0%.
Likewise, we allow ourselves to remember that the capital is guaranteed, but not the profits. It is opportune to contract this type of deposits in years that project good prospects in the stock market.
The content that we have discussed in this article about structured deposits is very important, a topic of great interest to people when it comes to investing their money. Please note that structured deposits cannot be canceled early. If the investor does so, he will have to pay high penalty fees (which can reach 3-5%).
Below we present an audiovisual material so that you can expand on what is explained in this interesting article.