FINANCIAL INSIGHTS: AT-1
SG banks strong and stable despite uncertain AT-1 issuance market – experts They may face higher funding costs as lenders could demand higher risk premiums on AT-1 papers. SINGAPORE
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ingapore banks have a stronger resilience compared to their Asian counterparts, so experts say. But just how strong they are and how easily they adapt to global banking crises are occasionally put to the test. The zero write-off of Credit Suisse’s Additional Tier-1 (AT-1) bonds presented concerns over the impact of AT-1 bond losses on global banks. Although Asian banks are less likely to be dramatically affected, it pays to see how and why Singapore banks stand in the wind. Credit Suisse’s AT1 write-down AT-1 bonds are a type of hybrid debt that can be converted into equity if a predetermined event occurs, acting as an additional capital and buffer for banks. That’s why Credit Suisse’s $17-billion write-down of AT-1 notes early this year caused such a stir in the industry. The “Lion City” has been marked to have a lesser chance of following in the footsteps of the AT-1 writedown of the Swiss bank, according to Gary Ng, senior economist at Natixis Corporate & Investment Banking. “Singaporean banks have higher ratings than Asian peers with minor AT-1 bond price movement and low reliance on AT-1, and therefore the impact is limited to credit ratings. Based on our calculation, DBS and OCBC’s AT-1 to Common Equity Tier 1 (CET 1) ratio is around 5%, lower than the average level of 14% in Asia,” Ng told Asian Banking and Finance. He emphasised that Singapore’s AT-1 bond coupon rate is one of the lowest in the region at 3.6%. Thus, a slight increase would not have a great impact on general funding costs. Yet, amid these developments, complacency is not the right attitude. Asian banks with a global footprint or those said to have significant holdings in AT-1 instruments experienced notable declines. 16 ASIAN BANKING & FINANCE | Q3 2023
Gary Ng
A slight increase would not have a great impact on general funding costs
Luckily for other banks, the fall was relatively modest. Whilst it cannot be claimed that Asia is completely shielded, it is at least not in the direct path of a severe storm, Natixis CIB stated in its research note. “Besides, the sell-off is more intense for Asia’s banks with lower credit ratings. In this context, Singapore and South Korea are relatively better. Even if its credit rating is lower, the market perceives China to have limited financial links with global banks,” the note added. The challenge Singapore banks tend to face in this scenario is higher funding expenses as lenders could demand higher risk premiums on AT-1 papers, Ng said. Singapore banks’ niche Singapore is one of the two markets in Asia that practice statutory bailin regimes to ensure no creditor worse off (NCWO) coverage in times of resolution.
According to CreditSights, the absence of a loss absorption hierarchy makes it unclear when a statutory bail-in regime is also existing. However, banks are mandated to carry resolution plans on what can be solved. The Swiss Financial Market Supervisory Authority (FINMA) defines an NCWO as safeguarding the rights of creditors which can be impacted by a resolution. Thus, under the NCWO principle, creditors should not suffer a more unfavourable outcome from a restructuring compared to what they would have experienced if the bank had been liquidated. S&P Global Ratings said predicting precise outcomes can be challenging at times, particularly in the Asia Pacific region where the application of bail-in concepts has not undergone extensive testing. “When a bank is under stress the factual circumstances are
Skyscrapers of major banks in Singapore located in the Marina Bay Financial Centre (Photo by Agence France-Presse)
