Asia banks may face difficulty bolstering capital via AT1s – Citi

HONG KONG (Reuters) – Asian lenders may find it difficult to replenish their capital by issuing Additional Tier-1 (AT1) bonds, Citigroup (NYSE:) said in a research note on Wednesday, after the Swiss authorities’ move to wipe out Credit Suisse bonds as part of its takeover deal.

The challenge will be particularly acute for a large number of smaller banks in Asia more reliant on AT1s compared with Western peers due to tighter regulatory liquidity requirements.

Under the takeover deal, the Swiss regulator determined that Credit Suisse’s AT1 bonds with a notional value of 16 billion francs ($17.35 billion) would be wiped out, a decision that stunned global credit markets and angered many holders.

AT1 bonds, which can be converted to equity, rank higher than shares in the capital structure of a bank. If a bank runs into trouble, bondholders will usually come before shareholders in terms of getting their money back.

The write-down to zero at Credit Suisse will produce the largest loss in the $275 billion AT1 market to date.

Citi said in its note it expected the Credit Suisse fallout to trigger re-pricing of AT1 across Asian banks’ capital structures.

Asian banks “more reliant on AT1 may face increasing difficulty replenishing capital”, which in turn may slow their pace of balance sheet expansion and help tame the inflation outlook and rate hike pace.

“Regulators may tighten capital and liquidity requirements, which may impact smaller banks more,” Citi said in the research note.

Citi, however, said the Credit Suisse move was unlikely to undermine the broader AT1 market in Asia in the long-term, as across the region the terms and conditions of such instruments offer greater investor protections.

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