Posted inFixed Income

How Asia escaped the AT1 crisis in confidence

FSA canvassed the opinions of asset managers on how Asia has been spared from the fallout from the Credit Suisse debacle.
Hand is turning a dice and changes the word "Bank" to "Bail"
Omar Slim, PineBridge Investments

Asian banks have not escaped scrutiny following the controversial decision to write down Credit Suisse’s AT1 bonds, but they have largely been spared from the fallout by their unique characteristics such as their stable retail deposits and more stringent regulatory frameworks.

That is the view at least of the asset managers whose views FSA canvassed, some of whom said that now was even a good opportunity to buy AT1 bonds on a selective basis.

“It is a highly unusual event and challenges the way market participants look at AT1 bonds and the capital structure,” said Omar Slim, co-head of Asia ex-Japan fixed income and portfolio manager at PineBridge Investments.

“Yet, in places such as Asia, the impact is more muted because the majority of Asian banks have a different fundamental and call risk than the European banks.”

As part of the multi-billion franc bailout of Credit Suisse by Swiss rival UBS, the former’s AT1 bonds with a notional value of SFr16bn ($17.8bn) were wiped out, while shareholders who typically rank below bondholders in the liability structure were compensated.

The decision sparked anger among bond investors globally, many of whom are now mounting legal challenges, while it also led to a spike in AT1 yields in Europe. The Bloomberg European Banks CoCo Index saw yields of European AT1 debt hit 16% following the event, whereas yields were as low as 7.8% in February.

However, while Asian banks’ capital structures have come under scrutiny as investors reassess the risks inherent in bank stocks and bonds, the blowback has been less significant than elsewhere. According to Natixis, the decline in Asia’s AT1 bond prices was 4.3% on average after the incident, which is lower than the double-digit drops in many markets.

Last month, Sumitomo Mitsui Financial Group even issued $1bn of AT1 debt, becoming the first major global bank to do so since the wipe out of Credit Suisse’s AT1 bonds.

Although prices have recovered, we still see room for further spread compression and believe that in-depth fundamental research can help filter the most attractive opportunities in this market,”

rob thomas, t rowe price

According to asset managers, this is at least in part due to the nature of Asian banks themselves. For example, according to research from Endowus, household current accounts make up around 60% of Asian banks’ deposits, a far higher proportion than in the West.

In addition, Asian banks tend to have more common equity on their books than their Western peers, typically above 15%, Endowus also notes.

“It is our view that in terms of their fundamentals, Asian banks…are strongly capitalised, and have good diversified liquidity, credit buffers and conservative business models,” wrote UOB Asset Management in a research note.

Andrew Fraser, abrdn

The second factor that has counted in their favour has been the action taken by regulators.

Days after the writing down of Credit Suisse’s AT1 bonds, the Monetary Authority of Singapore issued a statement reassuring investors that in resolving a financial institution, it would abide by the hierarchy of claims in liquidation.

The Hong Kong Monetary Authority also made similar remarks in the immediate aftermath to calm the markets.

Despite these factors counting in favour of Asian lenders, asset managers noted that it would take time for confidence to return to the market completely.

“Despite attractive yields in the AT1 asset class, we see Asian investors reacting with caution now,” said Andrew Fraser, head of fixed income research at abrdn.

“But with the Japanese issuance in past few weeks, we believe there is more confidence in the Asian market compared with that in Europe.”

Nonetheless, asset managers see opportunities on a selective basis with PineBridge’s Slim singling out Singapore, Hong Kong, Japan and Australia in particular.

Rob Thomas, T Rowe Price

These views were echoed by Rob Thomas, credit analyst in the fixed income division at T Rowe Price.

“Although prices have recovered, we still see room for further spread compression and believe that in-depth fundamental research can help filter the most attractive opportunities in this market,” he said.

Asset managers FSA spoke with noted that one means of restoring confidence would be for banks to buy back their bonds at the first available call date. According to Goldman Sachs research, there are 91 securities in Asia Pacific that face upcoming call dates in 2023.

Part of the Mark Allen Group.