20221104-招银国际-CMBI_Credit_Commentary_Asian_AT1s_Part_II_–_Picks_on_DM_AT1s_15页_1mb

CMBI Credit Commentary: Asian AT1s Part II – Picks on DM AT1s

Executive Summary

In Part II of the Asian AT1s commentary, CMBI focuses on AT1s in developed markets (DM) across Asia, specifically Hong Kong, Singapore, South Korea, and Australia. The report highlights three AT1s as top picks: DBSSP 3.3 PERP, UOBSP 3.875 PERP, and SHINFN 5.875 PERP. These instruments are favored due to their more balanced risk and return profile, shorter tenor, and competitive yield pick-up (418-1255bps) over senior bonds.

The report notes that the non-call of Heungkuk Life Insurance and APRA's guidance on "uneconomic calls" have raised concerns about the predictability of returns. However, it maintains that Asian DM AT1s, especially those issued by major banks and Chinese G-SIBs, offer more predictable returns due to their strong capital adequacy levels.

Core Content and Key Information

High Return Predictability for Asian DM AT1s

• Loss Absorption Framework: The loss absorption triggers vary by region, with South Korea requiring a regulator's designation of insolvency, while Australia has a mechanical trigger at CET1 ratios below 5.125%.
• Capital Adequacy: The selected banks in HK, SG, KR, and AU have robust capital ratios, with CET1 ratios significantly above regulatory requirements.
• Non-Call Risk: There has been no loss absorption or distribution cancellation for DM AT1s so far. Banks have a strong incentive to maintain dividend payments due to reputational and operational concerns.

Yield Differential Over Senior Bonds

• The yield to call (YTC) of the selected AT1s is competitive, with DBSSP 3.3 PERP at 9.3%, UOBSP 3.875 PERP at 9.4%, and SHINFN 5.875 PERP at 18.1%.
• The yield differential over senior unsecured bonds is widening, offering better entry opportunities for investors.

Our Picks

• DBSSP 3.3 PERP: YTC 9.3%, year to call 2.3, price 87.3.
• UOBSP 3.875 PERP: YTC 9.4%, year to call 1.0, price 95.6.
• SHINFN 5.875 PERP: YTC 18.1%, year to call 0.8, price 91.6.

Key Features of Selected AT1s

Low Likelihood of Loss Absorption

• Capital Buffers: The CET1 ratios of the selected banks are well above regulatory requirements, with an average buffer of 8% in Hong Kong, 4.7% in Singapore, 7.4% in South Korea, and 3.8% in Australia.
• Regulatory Frameworks: In South Korea and Hong Kong/Singapore, loss absorption is discretionary, while in Australia, it is mechanical if CET1 falls below 5.125%.

Non-Call Risk Considerations

• Heungkuk Life Insurance's Non-Call: The non-call of HUKLFI 4.475 PERP is considered an idiosyncratic event due to the bank's smaller market share and lower credit rating.
• APRA's Guidance: APRA's stance on "uneconomic calls" may increase non-call risk in Australia, especially for AT1s callable in 2026-2027.

Bank Performance and Capital Ratios

• DBS, UOB, and Shinhan Bank: These banks are systemic importance banks with consistently low NPL ratios and strong capital positions, even during the 2008 economic downturn.
• Profitability: These banks have maintained higher net interest margins compared to peers since 2017, supporting their ability to sustain dividends and AT1 distributions.

Excluded AT1s

• BNKEA: Excluded from the picks due to weakening profitability and asset quality, with significant exposure to China's property sector. Its CET1 and Tier 1 ratios have deteriorated, and its ROAA and ROAE have shown a declining trend.

Conclusion

The report concludes that the selected AT1s offer a more balanced risk and return profile with shorter tenors and competitive yields. Despite recent market noise and non-call events, the likelihood of loss absorption, distribution cancellation, and non-call on the first call date remains low. CMBI remains selective in its recommendations, emphasizing the importance of capital adequacy and regulatory frameworks in assessing the viability of AT1s.