Catering to Asia’s bank capital appetite

The perpetual tier-1 bond issue by Julius Baer in mid-November marks the latest example of European banks seeking Asian investor support to secure cornerstone capital bond issues.

Julius Baer's S$450 million ($317 million) additional tier 1 (AT1) issuance, on November 13, is just the latest development in a string of European banks securing capital from Asian Investors.

On April 9, Dutch bank ING topped up its capital base with a $2.25 billion alternative tier-1 transaction. US investors, as expected, took most the bonds. But 30% of the issue also ended up in the hands of extremely eager Asian investors. 

According to bankers in involved in various European bank debt capital issuances this year, securing the Asian portion of allocations has been key to the success of many European bank Basel III-compliant issues this year. 

It’s not just relatively international names like ING or Switzerland’s UBS that have been able to do so. Even banks like Swedbank, Svenksa and DNB – which would be unfamiliar to the man on the street in Hong Kong or Singapore – have placed large portions of US dollar capital with Asian investors.

Swedbank in particular placed about 18% of its Reg S deal to Asia, while DNB distributed about 12% of its AT1 issuances. The banks’ ability to attract Asian investors was key to the success of their respective transactions.

Bankers say the region’s bid has proven key to helping European bank borrowers obtain appealing deals.

“Diversification of distribution is always great,” Carla Goudge, head of debt syndicate for Asia-Pacific at HSBC told FinanceAsia, “but there is also black and white argument in terms of dollars and cents for involving the Asian buyer base in transactions where they will have natural demand like bank capital.

“Pricing gets tighter.”

Shifting demand

Asia’s enthusiasm for European bank capital debt and hybrid issues is a relatively recent phenomenon.

Back in 2013, Barclays was one of the first issuers of a Basel III AT1 dollar transaction. Asian investors comprised just 6% of the order book for the UK bank’s deal.

There are two simple reasons for this rising demand: yield and safety.

Bank of Singapore Andreas Kuehrer, director of fixed income at Bank of Singapore, noted his private bank clients are still trying to build rather than just retain wealth, so they are consequently looking for higher yields from established financial institutions.

When assessing would-be borrowers, Asian high net worth investors generally look for strong ratings, high quality and healthy, utility-like revenue streams.

“Our clients like to see banks that are big institutions that have changed their business model entirely, coming away from volatile market driven businesses to more buoyant retail and private wealth management,” said Kuehrer.

He anticipates HNW demand for European bank capital deals to remain robust well into 2016; however, he noted that issuers have of late been neglecting the region in road shows.

Such neglect may dampen enthusiasm, despite the recent strength of Asian investor support for European bank capital deals. The region’s appetite for bank capital is not entirely indiscriminate.

Private bank clients can be reluctant to buy deals from banks going through leadership changes or larger reorganisations, such as Deutsche Bank, Barclays and even Standard Chartered, Kuehrer says.

Demand diversification

That is not to say these borrowers will be unable to sell their instruments into Asia. They may just have to pay a little extra to do so.

“The investor base is robust and growing in the Asian region, and demand for these types of bonds will still be there,” said Jean-Charles Sambor, director of the Asia-Pacific Region for Institute of International Finance.

Regional investor appetite for European debt capital has diversified beyond private bank buyers like Kuehrer. Thai pension funds and Philippines-based pension funds have been keen to buy up assets like European bank capital bonds in an effort to diversify risk, noted Sambor.

“It’s a long-term structural trend that Asia is becoming a more important source of debt capital demand.”

Banks from Europe and beyond appear likely to meet this growing demand.

Australia’s big four banks have all issued bank capital deals into Asia over the past year in anticipation of complying with the regulator’s total loss absorbing capacity (TLAC) principles.

TLAC requirements aim to bolster capital and leverage ratios, ensuring systemically important banks are equipped to continue functions without threatening financial market stability, or requiring taxpayer support during financial crises.

TLAC assets consist of instruments that can be written down or converted into equity in case of resolution: capital instruments (CET1, AdT1 and T2), together with long-term unsecured debt – subordinated, and senior debt.

To raise such capital, ANZ has come to the market twice in 2015, while Commonwealth Bank issued in March, and Westpac did so in August – all in local Asian currencies. Meanwhile NAB raised $750 million on February 17 through a hybrid issuance listed on the Australian Securities Exchange.

As European banks move to comply with new TLAC capital requirements, there’s reason to expect similar deal flow to emerge from them. 

“We have seen Australian banks build up their presence in the Asian local currency bank capital markets this year, which provides a very healthy rationale that we’ll see more supply from European bank capital issuers in 2016,” predicted Goudge.

Regional investors may wish to brush up on their knowledge of smaller European banks. It could well come in handy.

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