S’pore bank AT1s slip on financial sector fallout but lenders not significantly impacted

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SINGAPORE – Singapore banks have not been spared from the fallout of Credit Suisse’s takeover by UBS, with their Additional Tier-1 (AT1) bonds seeing more volatility since news of the deal.

AT1 bonds form part of banks’ capital adequacy requirements. Despite the recent volatility, the three local lenders are still well-placed to shore up their capital if the need arises, experts said.

AT1 bonds help to absorb a bank’s losses and strengthen its financial position when capital requirements fall below certain levels relative to its assets.

The forced marriage of Credit Suisse and UBS – Switzerland’s two largest banks – involved wiping out some US$17 billion (S$22.7 billion) worth of Credit Suisse AT1 bonds to reduce the burden on UBS.

This generated controversy – unlike holders of these bonds, the bank’s shareholders did not lose everything following the merger. This marked a deviation from the traditional capital structure where AT1 holders rank behind senior bond holders but ahead of equity holders.

The move has weighed on the US$250 billion AT1 bond market globally and clouded sentiment over such issuances in the future.

In Singapore, DBS Bank, OCBC Bank and UOB have 11 AT1 bonds outstanding with a total value of about $7.65 billion, according to The Straits Times’ checks on Bloomberg data. All except UOB’s 5.25 per cent bond – which carries the highest yield among the lenders – were trading below par as at Monday evening, the data showed.

DBS’ 3.3 per cent dollar bond fell to a range of 89.4 and 90.8 cents on the dollar on March 20, after news of the Credit Suisse deal broke. The range was 93 to 93.8 cents on the dollar before the deal.

It recovered to 92.7 to 93.7 cents on the dollar as at 9.30pm on Monday.

The range represents the difference between the bid and ask prices of the bond.

UOB’s 3.875 per cent dollar bond traded between 97 and 97.9 cents on the dollar as at Monday evening, slightly shy of its 97.7 to 98.4 cents on the dollar range on March 17.

Bloomberg Intelligence Asian financials credit analyst Rena Kwok noted that Singapore banks’ dollar AT1s have sold off less than most peers, thanks to their robust credit fundamentals and relatively low non-call risks – when issuers do not redeem the bonds at their scheduled call dates.

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