20221012-招银国际-CMBI_Credit_Commentary_Asian_AT1s_Part_I_–_Our_picks_on_Chinese_G-SIBs_AT1s_11页_1mb

CMBI Credit Commentary Summary

Core Content

This document provides an analysis of Asian AT1s (Additional Tier 1 instruments), with a focus on Chinese Global Systemically Important Banks (G-SIBs) AT1s. The main argument is that Chinese G-SIBs AT1s offer more predictable returns compared to their European counterparts, despite offering lower yields.

Main Views

• Return Predictability: Chinese G-SIBs AT1s are considered more predictable due to:

  • Low likelihood of loss absorption (no precedent for principal write-down or equity conversion).
  • High certainty of being called on the first call dates.
  • Low probability of distribution cancellation.

• Comparison with European AT1s: European AT1s offer better yields-to-call (YTC), but they have a higher risk of loss absorption and distribution cancellation, as evidenced by historical events.

• Recommended AT1s:

  • BCHINA 3.6 PERP (callable Mar'25) and ICBCAS 3.58 PERP (callable Sep'25) are highlighted as top picks.
  • These AT1s offer decent yield pick-up (81-98bps) over their senior bonds and are relatively liquid.

• Yield Differential: The yield differential between these AT1s and their senior bonds has recently reached lows, making them attractive yield pick-up trades.

Key Information

Factors Influencing Return Predictability

1. Loss Absorption:

   • No historical instances of principal write-down or equity conversion for Chinese G-SIBs AT1s.
   • The likelihood of loss absorption is low due to strong fundamentals, ample capital buffers, and the expectation of continued profitability.

2. Distribution Cancellation:

   • No Chinese G-SIB has ever cancelled AT1 distributions.
   • Government regulations require state-owned banks to maintain a minimum dividend payout ratio, which indirectly supports AT1 distribution continuity.

3. Call Redemption:

   • All Chinese AT1s have been called on their first call dates.
   • Confidence in call redemption is based on historical examples, such as Huarong's calls during financial distress.

Capital and Risk Metrics

• CET1 Ratios:

  • Remain above regulatory requirements for Chinese G-SIBs.
  • BOC has the lowest CET1 ratio (11.33%) among G-SIBs, but still well above the minimum.
  • ICBC has the highest CET1 ratio (13.29%) among G-SIBs.

• Non-Viability Trigger Events:

  • For AT1s with CET1 triggers, CBIRC's approval is required for equity conversion.
  • This makes the loss absorption process more discretionary and less likely to occur.

Yield and Tenor Analysis

• Yield to Call (YTC):

  • BCHINA 3.6 PERP and ICBCAS 3.58 PERP have YTCs of 5.5% and 5.4%, respectively.
  • These yields represent significant pick-ups over their senior bonds (81-98bps).

• Average Tenor:

  • Chinese AT1s have an average tenor of 5 years from issuance to call.
  • In contrast, European banks have an average tenor of 8.8 years, and European G-SIBs of 7.8 years.

Capital Buffer and Asset Quality

• BOC:

  • Diversified exposures with a lower real estate loan ratio (5.24%).
  • Stable NPL ratio (5.67%) despite the property liquidity crisis.
  • Strong capital adequacy ratios (CET1: 11.33%, Tier1: 13.63%, CAR: 16.99%).

• ICBC:

  • Highest CET1 ratio (13.29%) among G-SIBs.
  • Reduced real estate exposure and maintained stable NPL ratio (1.41%).
  • Well-capitalized to withstand economic shocks.

Conclusion

Chinese G-SIBs AT1s are seen as more predictable than their European counterparts due to lower risk of loss absorption, higher likelihood of redemption on first call dates, and regulatory frameworks that support distribution continuity. BCHINA 3.6 PERP and ICBCAS 3.58 PERP are recommended for their yield pick-up and liquidity.

Appendix Summary

• BOC is highlighted for its diversified exposure and strong capital position.
• ICBC is noted for its robust capital buffer and reduced real estate exposure.
• The document also outlines the legal and regulatory framework governing AT1s in China, emphasizing the discretionary nature of loss absorption and the importance of regulatory approval.

Risk Disclaimer

• This report is for informational purposes only and does not constitute investment advice.
• The information is based on publicly available data and is subject to change.
• There are risks involved in trading securities, and actual outcomes may differ from projections.