by Henrik Raber, Global Head, Capital Markets, Standard Chartered
Global Head, Capital Markets,
The first sign of a sea-change in sentiment among investors was seen in January, when pan-Asian insurer FWD Group’s USD-denominated deal was greeted with very high levels of enthusiasm, showing that markets were on a risk-on mode. Since then, many banks have stepped forward, whether to meet specific needs or to take advantage of heightened demand.
In fact, even corporate perpetual issuance activity has been on a high with Asian issuers pricing even fixed-for-life perpetual transactions at very compelling rates. In 2016, supply and demand were tempered by the uncertainties caused by unexpected political developments, such as the UK’s Brexit vote to leave the European Union and the election of US President Donald Trump, and proposed changes to bank capital regulations in Europe. The dislocation in the bank capital markets saw a contagion effect across geographies in the asset class. Most of it settled over the course of the year with favourable regulatory outcomes, paving the way for a strong start to 2017.
The USD markets in Korea and India have been fairly restricted with limited issuances, primarily given healthy capital ratios and strong local markets for such issuances respectively. Likewise, with ASEAN banks, issuances in the USD markets have been restricted for a mix of the above reasons. That said, the benign market conditions may make it hard to resist the temptation to fix the roof while the sun shines, perhaps also acting in anticipation of loan growth.
Beyond G-SIBs, differences across regulators are an important factor in determining price and appetite in the bank capital market, because Basel prescribes only minimum requirements, enabling local jurisdictions to specify additional measures. Regulators can require their banks to hold higher levels of capital than Basel’s base level, but two other key distinctions can play a big role in pricing loss-absorbing AT1 instruments. First, countries including India and China impose a numerical trigger (a percentage of common equity tier 1 capital) for loss-absorption of additional tier 1 instruments. Second, countries vary in the role regulators can play in managing or determining the non-viability of issuers.
While Hong Kong, Singapore, Philippines and Malaysia allow regulators discretion to trigger loss-absorption of bonds due to non-viability of issuer, the more investor-friendly South Korean and Japanese jurisdictions permit pre-emptive systemic support to keep banks solvent and stave off loss-absorption on these instruments.
The tier 1 asset class has been one of the best performing this year. When analysing the potential returns from the bank capital market, many conscientious investors are sifting carefully through the regulatory nuances across Asian jurisdictions in order to reach their individual conclusions about the attractiveness of issues. Nevertheless, as many sophisticated global investors take a highly technical approach to pricing bank capital issues, alternative sources of demand that focus more on yield priorities, e.g. retail investors and private banks, may allow issuers to drive down pricing below that which a technical analysis might suggest. In the medium term, it’s all to play for. To that extent, it might be argued that the bank capital issuance has something to offer everyone.
Henrik Raber is the Global Head of Capital Markets at Standard Chartered Bank. He joined the Bank in July 2009 as Regional Head of Capital Markets for Europe, Africa and Americas, and took on the role of Global Head of Debt Capital Markets in March 2010 before assuming his current role in mid-August 2014. Prior to Standard Chartered, Mr Raber was with UBS Investment Bank, where he headed European Credit Flow Sales and Trading, which encompassed Investment Grade, High Yield and Loans. Before working at UBS, Mr Raber was with Lehman Brothers for eight years in Fixed Income credit trading and capital markets.
Euromoney and Standard Chartered will be running a series of webinars on securities services. The next will be ‘RMB Investors Forum: reform and reinvention in China’s capital markets’ on June 22. Find out more.
This material has been prepared by Standard Chartered Bank (SCB), a firm authorised by the United Kingdom’s Prudential Regulation Authority and regulated by the United Kingdom’s Financial Conduct Authority and Prudential Regulation Authority. It is not independent research material. This material has been produced for information and discussion purposes only and does not constitute advice or an invitation or recommendation to enter into any transaction.
Some of the information appearing herein may have been obtained from public sources and while SCB believes such information to be reliable, it has not been independently verified by SCB. Information contained herein is subject to change without notice. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCB or its affiliates.
SCB does not provide accounting, legal, regulatory or tax advice. This material does not provide any investment advice. While all reasonable care has been taken in preparing this material, SCB and its affiliates make no representation or warranty as to its accuracy or completeness, and no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. SCB and its affiliates expressly disclaim any liability and responsibility for any damage or losses you may suffer from your use of or reliance on this material.
SCB or its affiliates may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction. This material is not for distribution to any person to which, or any jurisdiction in which, its distribution would be prohibited.
You may wish to refer to the incorporation details of Standard Chartered PLC, Standard Chartered Bank and their subsidiaries at http://www.standardchartered.com/en/incorporation-details.html.
© Copyright 2017 Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank