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APAC Banks: AT1 Investment Opportunities
Pramod Shenoi – Co-Head of Asia-Pacific Research
Lim Ze Hao, CFA – Analyst - Asia-Pacific Banks
Karen Wu, CFA – Analyst - Asia-Pacific Banks
EXECUTIVE SUMMARY
- The APAC AT1 market has bounced back faster than we were expecting.
- We evaluate the different issuers vs. certain criteria we have established post the Credit Suisse AT1 write off – CET1 ratio, business model, profitability, liquidity profile, extension risk, AT1 price volatility, perceived authority support for AT1 bondholders, and regulatory oversight – and then compare the YTC levels of the APAC AT1s versus the criteria to see which names look relatively attractive.
- Although we do expect volatility during the year which will make entry points into this segment more attractive, we do see some yields as sufficiently interesting for investors.
MARKET CONDITIONS
AT1 markets have bounced back faster than we were expecting. After a strong fall in prices on Monday as we had expected post the Credit Suisse AT1 write off, AT1 prices bounced back on Tuesday and the trend has continued into today. We were on the watchout for the forced sale of bonds by PB clients if they were unable to fulfill margin calls as AT1 bond prices fell; however, we were also cognizant that there is liquidity on the sidelines waiting for the correct opportunity and that seems to have won out in this instance.
Yields are understandably wider than they were at close of business on Friday. We have a ‘good enough’ approach to investing, i.e. are the yields attractive enough to consider an investment. At the current levels, we believe the answer is yes for some names, although we do caveat that it is well likely that as market conditions become more challenging going forward, with higher interest rates and economic slowdowns forecast, that with equity market volatility we will also see volatility in AT1 yields, and there are likely to be better entry points along the way.
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