After years of Chinese banks dominating the Asian supply of alternative tier one bonds, banks from countries across the region finally got in on the act in 2016.
DBS Bank raised $750 million in August, smashing the record for the lowest-coupon in the AT1 format by offering the first — and so far only — such deal from Singapore. State Bank of India opened the offshore AT1 market for Indian borrowers the following month. South Korea's Woori Bank, which made its debut in 2015, has since sold two more deals, including a $500 million bond this week.
Are we approaching a new era of bank capital issuance in Asia, where banks from countries across the region regularly turn to international investors to help hit their minimum ratios?
Don't bet on it. The supply from banks outside of China is likely to remain irregular in the coming years.
This is partly down to smaller funding needs. For example, the entire Philippine banking system held assets worth $272 billion at the end of March, just 7.5% of the assets held by ICBC alone.
But it is also because in a lot of Asian local currency bond markets, staying at home remains by far the cheapest option.
“It’s always been a dynamic of the Asian bond markets that domestic funding is often cheaper for banks than turning offshore,” said Sean McNelis, head of FIG DCM and head of the financing solutions group, Asia-Pacific at HSBC. “That limits the supply we see in the international markets.
“But over time, we will see selective issuance in the dollar market — either because it becomes cheaper, or because the issuer is looking for a natural hedge against dollars on their balance sheet.”
McNelis was speaking alongside Lee-Shin Koh, a director in Citi’s DCM team specialising in FIG and hybrid capital. The two men were addressing a captive audience at FinanceAsia’s recent Borrowers and Investors Forum in Hong Kong, an event that included discussions on infrastructure, distressed debt, high yield and the role of ETFs in the debt market.
While neither man was willing to project an exact figure for AT1 and tier two supply in the com — a fool’s errand, given the fast-changing nature of Asia’s bond market — both agreed that China would likely make up the bulk of supply. And there is little doubt that supply will grow.
Asia’s banking regulators are still in the process of implementing full Basel III rules for their domestic banks, but the China Banking Regulatory Commission has a tougher task than most. The country’s four biggest banks have been declared ‘global systemically important banks’, or G-SIBs, by the Financial Stability Board, forcing them to adhere to an additional set of regulations.
In practice, that means they will need to issue total loss-absorbing capital (TLAC). A lot of it.
“Based on some calculations, there is as much as $500 billion of TLAC funding required by the Chinese banks,” Citi’s Koh told the audience. “Depending on the source, that number well exceeds the shortfall of the entire European banking system.”
It remains to be seen quite how China's banking regulator will implement its own version of TLAC. In the United Kingdom and the United Kingdom, regulators have opted for senior bonds issued by bank holding companies. In France, bankers have closed tier-3 bonds at the operating company level.
China has time to figure all of this out. It has been given an emerging market exemption from TLAC until 2025, although this could get accelerated if its corporate bond market grows to 55% of GDP.
In any case, bankers think it is likely Chinese regulators will not choose to wait until the eleventh hour before pushing banks to sell TLAC bonds. Indeed, the first deals could start coming within two or three years.
The G-SIB rules do not apply to Asian banks outside of China and Japan. But that does not mean they will not lead to a boost in issuance. There is already talk in Australian and Singapore about applying 'domestic systemically important bank' regulations, forcing local banks to sell homegrown TLAC deals in part to show they are just as strong as the global players.
For investors who are already anticipating a major source of TLAC issuance from China, this will be a welcome surprise, offering diversification — and perhaps the chance to get a better yield from China's notoriously stingy bank issuers (see below).
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Chinese AT1s: tight, but just about right Chinese AT1 bonds should be a tougher pitch to investors than those in Europe and the United States — if only because these deals tend to be priced much more tightly than their global rivals. When ICBC Asia raised $1 billion from an AT1 last July, it got away with a yield of just 4.25%. The following month the Royal Bank of Scotland, Barclays Bank and Standard Chartered all followed with their own deals — each paying more than 300bp over ICBC’s rate. This pricing difference holds even for those Chinese banks that are little known among the global investor base. China Zheshang Bank, hardly a household name, sold a $2.175 billion bond in late March, giving investors a yield of 5.45%. At the time, investors could have picked up Standard Chartered’s recent $1 billion AT1 at a yield of around 7.5% in the secondary market. “It’s a constant point that comes up with investors,” said McNelis. “The Chinese AT1s are a few hundred basis points tighter than European banks. Is that all just local demand? Perhaps. But a lot of it is fundamental, too.” The tight pricing is partly a result of heavy demand from local investors, but international buyers have also come to accept the new reality. This is, in part, because investors need to calculate the likelihood of local regulations declaring an institution as ‘non-viable’ — and in Asia, they have come to believe such a bold move is less likely. “The dramatic change in the last year or so has been in the investor base,” said Koh. “ Many real money funds traditionally weren’t buying Asian AT1s — because why would you when you can buy European bank AT1s at higher yield? But it’s now being seen as a legitimate separate asset class, often with more investor friendly product terms, and increasingly investors also recognise the significantly higher likelihood of government support in Asia versus Europe.” Not all Chinese banks are turning offshore for capital. Postal Savings Bank of China, which listed in Hong Kong last year, got approval from local regulators to sell an eye-watering Rm50 billion ($7.24 billion) of tier two bonds. It has now hit that target in the domestic market, selling a Rmb30 billion deal last October and a Rmb20 billion issue in late March. But for those banks that do turn offshore, it is clear that a mix of strong Chinese demand and reliable government support is helping keep pricing well inside what European and US banks are being forced to pay. |
