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Thursday, 18 July 2019

Through a dry spell

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The Asian US dollar subordinated capital market is having a poor year, leaving FIG bankers to focus on senior debt and local currency markets.

Bank capital deals have been few and far between this year in Asia, particularly in US dollars, a result of slow asset growth at a time of economic weakness and unfavourable conditions in the European subordinated debt market.

Issuance from Asia in the first half of the year had been limited to a handful of small Tier 2 deals, before ICBC Asia printed the year’s first Additional Tier 1 from Asia, excluding Japan and Australia, in mid-July.

Bankers foresee a pick-up, although not a major rush, in the second half and accept that this will be a disappointing year for subordinated bank capital financings in the US dollar market.

The dearth of deals has been attributed to a number of factors. Asian banks are among the best capitalised in the world, with little need to raise funds. Furthermore, a sluggish economic picture has translated into weak asset growth, negating the need to increase capital buffers.

“The market could change, but right now, fundamentally, there just isn’t enough desire from issuers.”

For most of the region’s banks, printing in local currencies has also been far cheaper. In May, for example, CIMB issued a M$1bn (US$250m) AT1 at 5.8%, a price bankers described as unimaginable in dollars. Similarly, Indian banks need vast amounts of capital, but are not willing to pay the price that the US dollar market would require.

The pricing mismatch between the local and global markets was underlined during the January turmoil in European subordinated bond markets, where yields on AT1s for some banks spiked to double digits. The Asian market held up relatively well at the time, but many banks put their plans on hold.

“We do find there are fairly robust local currency markets for bank capital in some countries,” said Madhur Mehta, head of Asian financial institutions in Standard Chartered’s debt capital markets group. “In these countries we see the domestic banks primarily accessing the local markets.”

Also working against the market is the growing consensus that Chinese banks, which have been among the most prominent issuers of bank capital, will sit out the second half. There was hope that ICBC Asia’s AT1, which set a record for the lowest-ever coupon for a US dollar AT1, would encourage more issuance, but there is little sign of China’s heavily renminbi-funded banks following suit.

Chinese banks issuing offshore subordinated bonds typically have to go through an onerous regulatory process that can drag on for over six months and bankers IFR spoke to knew of no such exercise. Large mainland banks are also waiting for regulators to establish a framework allowing senior debt to count towards the up-to-US$1trn in total loss-absorbing capacity that they will need to hold by 2025.

Pockets of issuance

Despite the poor outlook, numerous bankers pointed to two potential sources for new deals.

Singaporean banks are exploring AT1 and T2 bonds, but there is little anticipation of a stampede of issuance. The Singapore dollar subordinated market is far cheaper, and capital levels are already high, however a number of bankers and analysts expected there to be some opportunistic issuance. As one debt capital markets banker put it, “raise your bank capital before you need it, not when you need it.”

Singapore’s local currency subordinated market has been one of the busiest in Asia. In May, United Overseas Bank issued a S$750m AT1 at 4.0%. The country has also seen subordinated bonds from European banks such as ABN AMRO, Societe Generale and BPCE.

“We could see sizable US dollar bank capital transactions from the Singapore banks, but only on an opportunistic basis,” said Gene Fang, associate managing director, financial institutions group at Moody’s. “These banks are not in urgent need for capital.”

The prospects are better in South Korea, where recent regulatory changes have raised hopes for more issuance.

In late June, Korea’s Financial Services Commission tweaked rules to allow banks to issue perpetual securities in line with international standards, reopening access to the global markets. Previously, Korean banks issued AT1 securities with tenors of 30 years and an unlimited extension option. Global banking regulators had expressed concern, making it clear contingent capital securities had to be perpetual.

In January Korea also designated five banks as domestic systemically important banks, which comes with a requirement to have a minimum Tier 1 ratio of 9.5%. The five – Hana Financial Group, Shinhan Financial Group, KB Financial Group, NH Financial Group and Woori Bank – all exceed this threshold, but they could issue more capital to keep on the safe side.

Korean banks now look set to issue a decent amount of capital. Woori Bank is eyeing an AT1 transaction after the summer, and KEB Hana Bank is considering a similar transaction.

The country’s US dollar T2 market has also started showing signs of life. In mid-July Busan Bank priced a US$250m 10-year bullet T2 at Treasuries plus 210bp, with investors piling in to the tune of a US$2bn order book. Busan’s bonds were only the second US dollar Tier 2 out of South Korea this year, with the previous coming from Shinhan’s US$500m transaction in March.

Korea and Singapore may offer a few pockets of subordinated issuance in Asia, but the current climate is a sharp change from a year ago when many FIG bankers were expecting US dollar bank capital deals to be a major theme. Now, most appear more focused on senior FIG issuance as well as becoming more involved in local currency markets.

“It’s not a terrible market for them to issue,” said a senior FIG banker based in Singapore. “Spreads are pretty tight and there is definitely a bid for yield and for Asian banks. So the market could change, but right now, fundamentally, there just isn’t enough desire from issuers.”

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