20221124-招银国际-CMBI_Credit_Commentary__Asian_AT1s_Part_III_–_Picks_on_Asian_EM_AT1s_1页_1mb

CMBI Credit Commentary: Asian EM AT1s Part III – Picks on Asian EM AT1s

Executive Summary

• This is the final part of the trilogy on Asian AT1s, focusing on AT1s in Asian emerging markets (EMs) such as India, Indonesia, Philippines, and Thailand.
• Return predictability of Asian EM AT1s is lower compared to Chinese G-SIBs and Asian developed markets (DMs).
• Loss absorption and non-call incidents have occurred for some Indian banks, such as Yes Bank, Lakshmi Vilas Bank, and Dhanlaxmi Bank, highlighting the differential treatment by the government between private and public banks.
• In the case of IDBI Bank, its INR AT1 was called early in 2018 before the CET1 ratio dropped below the trigger level.
• Our analytical approach for Asian EM AT1s is more "bottom-up" due to limited historical data and regulatory discretion.
• We recommend KBANK 5.275 PERP and KTBTB 4.4 PERP for their balanced risk-return profile, ample capital buffers, and stable profitability.

Key Features of Asian EM AT1s

Loss Absorption Framework

• The loss absorption framework in Asian EMs is largely similar to that in DMs, with mechanical triggers in India and Thailand, and discretionary triggers in Indonesia and the Philippines.
• The CET1 ratio trigger levels are:
  • Philippines: 7.25%
  • India: 6.125%
  • Thailand: 5.15%
  • Indonesia: No CET1 ratio trigger (assessed via other criteria)
• The likelihood of loss absorption is ranked as: India > Thailand > The Philippines > Indonesia.

Capital Buffers and Non-Call Risk

• As of 3Q22, all Asian EM AT1 issuing banks have ample capital buffers by international standards.
• The CET1 ratio of KBANK and KTBTB is well above the regulatory minimums, with KBANK at 15.08% and KTBTB at 15.62%.
• These banks have shown stable profitability and low non-call risk, with no history of loss absorption or distribution cancellation.
• KBANK and KTBTB have had their CET1 ratios remain above 9.4% and 8.7%, respectively, during the economic cycle, which are still well above the regulatory minimums.

Our Picks: KBANK 5.275 PERP and KTBTB 4.4 PERP

• These AT1s offer a more balanced risk-return profile.
• They have higher yield to call (YTC) and stable profitability.
• The probability of loss absorption or distribution cancellation is considered low due to their strong capital positions and consistent performance.

Non-Call and Distribution Cancellation History

• There is no non-call history for USD AT1s in these four EMs yet.
• In some cases, non-call decisions are influenced by regulatory feedback and investor sentiment, as seen in South Korea and India.
• For example, ICICI Bank in India initially decided not to call its T2 bonds but later reversed the decision due to market reaction.

Yield Differentials

• KBANK 5.275 PERP and KTBTB 4.4 PERP have considerable yield differentials compared to comparable senior unsecured bonds.
• As of 23 Nov 2022, the yield differentials are 318bps and 365bps, respectively, placing them at the 32% and 38% quantiles of historical differentials.

Credit Metrics of Our Picks

Conclusion

• KBANK 5.275 PERP and KTBTB 4.4 PERP are recommended for their strong capital buffers, stable profitability, and low risk of loss absorption or distribution cancellation.
• The analysis highlights the importance of regulatory discretion and market conditions in the treatment of AT1s in Asian EMs.
• Investors should consider the reputational risk and potential regulatory influence when evaluating AT1s in these markets.