Spoilt for choice
Asian investors have grown comfortable with the new flavours of bank capital and remain as hungry as ever for yield, giving issuers the freedom to choose different structures and to narrow premiums.
If 2014 was a record year for offshore Asian bank capital supply, 2015 is shaping up as a seller’s market as issuers take a breather from jumbo offerings and eager investors remain hooked on the tempting returns associated with this still relatively new asset class.
Chinese banks have become the largest international issuers of Basel III-compliant paper in Asia since the region’s first trade in 2013, but, so far, only Bank of Communications, China Minsheng Bank and China Construction Bank are in the pipeline to sell Additional Tier 1 bonds.
Those issues are expected to pale in size to Bank of China’s US$6.5bn and Industrial and Commercial Bank of China’s US$5.7bn AT1s sold in the last quarter of 2014.
Back then, the BOC transaction was the world’s largest at the time of issue, while ICBC was the first to sell AT1s in Asia across three currencies.
“The investor base is hungry for higher-yielding products. So, as long as they understand the risk, I think there will be pretty good demand. Asian investors are pretty sophisticated now and understand banks well.”
“There are constant discussions with Chinese banks to look at pref shares and Tier 2, though the total volume is expected to be significantly smaller than 2014,” said Lee-Shin Koh, director of debt capital markets origination for Citigroup.
Bankers expect Asian bank capital supply to reach as much as US$15bn this year, compared with the US$22.1bn issued in the region in 2014. The AT1s from BOC and ICBC alone accounted for a combined US$12.2bn of last year’s total.
CCB plans to sell up to a quarter of its approved Rmb80bn issuance offshore, while BoCom is looking at around Rmb15bn away from China from up to Rmb60bn in AT1s.
“It is possible that other regional banks will look for capital to refinance redemptions, but will be subject to local currency pricing for many of them,” said Koh.
BoCom and CCB are expected to tap the markets relatively soon, especially because bankers have suggested issuers take advantage of a rate environment that is still cheap historically.
“Given that the rate cycle does look like it might rise before the end of the year, the window of opportunity is more likely post-summer for the expected issuance of T1, AT1 and T2 bonds,” said Frank Kwong, head of debt syndicate for Asia at BNP Paribas.
“Away from the Asian banks, there is a possibility that they will look at T2 as well.”
Despite recent volatility linked to the Greek debt crisis, Asian demand for bank capital is likely to hold steady. Regulatory regimes in Hong Kong, South Korea and Singapore have already proven more investor friendly with regards to bank resolutions than those in Europe. In addition, Asian credits have not been rocked to the degree of many in Europe, and the region’s investors continue to seek higher returns.
“The investor base is hungry for higher-yielding products. So, as long as they understand the risk, I think there will be pretty good demand,” said Kwong. “Asian investors are pretty sophisticated now and understand banks well. We’re seeing some conformity in the structures and also see repeat issuers, who may have done T2s and are now looking at AT1s.”
The combination of a thinner pipeline and strong demand is expected to be conducive for future supply. Banks also have the flexibility to choose between different types of bank capital.
“What we see in the market today is that both AT1s and T2s are well supported,” said Kwong. “The issuer has a choice to go to the market with both, which I think is unlike Europe, perhaps, where we see more volatility. There, you will see certain markets come and go in both AT1s and T2s.”
Premiums for loss absorption have come down significantly since the first deal from ICBC Asia two years ago. South Korea’s Woori Bank has shown that AT1s can be priced without new-issue premiums, but the performance of those bonds exemplify the merit of paying an extra spread for a stable execution process, especially in more volatile markets.
“Investors are no longer expecting huge new-issue premiums to get involved in transactions, but, given where the global markets are today, issuers are going to have to pay up,” said another senior banker on July 3. “In Europe, it was customary to pay new-issue premium of 30bp in the last two weeks.”
“This is a stark contrast from the first half, where new-issue premiums were passed over, depending on your window.”
One factor that may affect the current supply-and-demand dynamic of bank capital is the introduction of rules on lenders’ total loss-absorbing capacity, or TLAC.
Lenders in Asia have largely been spared the debate raging in Europe and the US over TLAC capital buffers, intended to prevent taxpayer-funded bailouts of banks deemed too big to fail.
Regulators in the region have yet to announce formal TLAC guidelines, but many bankers say they expect Asia to align standards with the rest of the world over time. For now, only global systemically important banks (G-SIBs) need to hold additional capital buffers and the big-three Chinese lenders are exempt for now, although they will have to conform eventually.
Citigroup’s Koh says discussions on TLAC beginning in November may start affecting the views of Chinese banks of further capital issuance.
“The biggest major challenge is if TLAC does drive a global increase in capital or quasi-capital issuance impacting supply,” said Citigroup’s Koh.
To lift TLAC ratios, banks are likely to issue far more T2 capital and create a new class of loss-absorbing senior bonds. However, Asian regulators have shown their uneasiness so far with the concept of bailing in senior debt, which is why Koh is still hesitant to consider TLAC as a serious issue at least for now.
Indeed, the Monetary Authority of Singapore has recently tabled proposals to limit its statutory bail-in framework to subordinated debt.
“This is unlikely to affect Asian demand dramatically though, unless Asian regulators do try and follow TLAC to some extent.” said Koh.
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