APAC Financials: CS AT1 Write-Off Implications

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
  • UBS stepped in to rescue CS over the weekend; AT1 bondholders however got wiped out in the process.
  • It is likely that the PONV clause was used as this wasn’t a resolution situation nor did the CET1 ratio fall below the trigger levels.
  • Within the APAC region, we see the authorities being more supportive of their financial institutions in South Korea and Japan, and in China the top set of banks have the government as their shareholder, so we are less likely to see capital security investors seeing losses amongst this set; amongst the other jurisdictions, the authorities may take similar action to FINMA other than for banks that are partially state owned.
  • We continue to be watchful of the business models of banks because a comfortable CET1 ratio by itself may not stem a liquidity run on the bank, as we have seen more recently.
  • While an AT1 write-off with the rest of the capital structure remaining outstanding is easier in Asia because of the contractual PONV regimes in place, we do not see enhanced risk.
  • We expect a risk-off sentiment that has started this morning in the APAC AT1 market to continue for at least a few weeks, in the higher beta names and names on which we have Underperform recommendations such as BEA and Citic Bank International.

In an ‘all-Swiss’ end to the events over the last few weeks as CS share price fell, UBS has acquired Credit Suisse. However, as part of the rescue plan, CS AT1 noteholders were wiped out while shareholders continue to exist/remain whole. While there was neither a resolution event (which would have resulted in shareholders losing their rights first), or a CET1 ratio trigger event (as the bank’s CET1 ratio was supposed to be above the regulatory requirements), it was likely the use of the PONV clause (where the authorities / public sector provided extraordinary support to the bank, in this case through liquidity support) that FINMA used to write-off the AT1 bondholders. The clause does state that the write-off should improve the bank’s capital adequacy without which, amongst other factors, it would be unable to repay debts or carry out its business; in the case of CS a combination of business model and shareholder support concerns led to clients reducing deposits, so more a current liquidity issue that had the potential for future capital adequacy issues.

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