European banks and insurers are facing a difficult political balancing act — looking to Asian markets to recapitalise their balance sheets, while at the same time paring back their operations in the region.
On Thursday, Zurich Insurance from Switzerland completed a highly successful $500 million perpetual, non-call-six hybrid bond deal that was sold 77% to Asian accounts. Most of the deal was placed with Asian private banking accounts and demand was such — at $4 billion — that pricing came in at 8.25%. This was 75bp inside the initial guidance set by leads Barclays Capital, Citi, HSBC and RBS.
The deal is the latest in a trend that started in earnest in 2010, when European banks and other financial institutions began coming to the region to raise much-needed capital. A perpetual deal by Prudential early last year was almost fully sold in Asia. Credit Suisse’s contingent-capital deal in February garnered $22 billion of demand for a $2 billion deal, with 18% of that demand coming from non-Japan Asia. During the summer, BNP Paribas sold 26% of a euro-denominated covered bond to Asian accounts, one of the highest Asian takes of any such transaction. This year, bankers at financial institutions groups in London report that they expect similar, if not greater, participation in their European deals from Asian accounts.
Even in the senior unsecured space — a market pretty much closed for most of the second half of 2011 — 2012 has got off to a bright start. Swedish bank Svenska Handelsbanken on Wednesday sold a €1 billion, five-and-a-half-year senior bond, of which 10% was snapped up by Asian investors. For much of last year, Asian accounts had been almost absent from what little senior unsecured issuance there was.
Bankers predict that this year many of the European bank recap deals will be targeted at Asian investors, who are hungry for yield and like highly rated names such as Svenska, Zurich, Rabobank and Credit Suisse. The European Banking Authority says some €106 billion (and counting) will be raised by European banks during the first half of the year alone. For many of these banks, the first leg of their roadshow will be the red-eye to Hong Kong.
But while the funding folk are running around the region with their begging bowl, head office is busily cutting back local operations. In recent weeks a number of banks have announced wholesale cuts to headcount and the closing of specific lines of business in the region. It is a dichotomy that will not go unnoticed by Asian governments, who look at these exercises through the totality of the relationship. If a bank suddenly decides to exit operations in one market, it cannot expect to then go to that country’s central bank or sovereign wealth fund and sell it some of its own bonds.
Financial authorities in Asia may take a leaf out of Poland’s book, by explicitly linking the awarding of mandates and the provision of reserves to institutions that contribute to the development of local capital markets. In Poland, cutting staff and closing desks has an immediate, Newtonian effect of closing off government business.
Of course this has always been the case in Asia but in a more subtle way. Goldman learnt its lesson early on when it struggled for years to get back on to government mandates after its 1994 pull-back from the region. It has not repeated the same mistake since.
In the past, when head office suffered, Asia bore the brunt of the cuts. But this time, with Asia providing such an important percentage of the funding mix, banks may want to consider things differently. After all, banks can just about get by without mandates, but they cannot survive without funding.
This is the first in a new regular column we are launching that will focus on Asia’s increasingly important role in global financial markets.