Fitch's latest Banks AT1 Tracker, highlights key trends and data on AT1 issuance in 1Q15. Chinese banks continued to dominate new issuance during the quarter, accounting for 40% of the around USD30bn in new AT1 volumes. This was sufficient for China to remain the single largest source for AT1 issues, although issuance by Chinese banks fell from the 89% of USD39bn in issuance in 4Q14. Notably though, the 1Q15 Chinese issues were exclusively in yuan for the domestic market.
Indian banks' AT1 bond issuance also picked up in 1Q15, topping the equivalent of USD1bn and coming from seven banks, but the volumes remain small compared with the capital requirement over the next several years. Fitch estimates that Indian banks will need to raise around USD200bn in capital by March 2019, of which almost half will be AT1. State banks account for a majority (85%) of the new capital requirement. State banks' profitability tends to be far weaker than that of the private banks, which limits internal capital generation while lower valuations also limit state banks' access to equity markets to raise core capital.
The trend in Asia in 1Q15 has been for banks to tap their home markets in local currency, but this is unlikely to continue indefinitely. Despite relatively shallow markets and concerns around risks related to these instruments, the size of the deals and pricing benefits for issuers owing to name recognition has made it attractive for issuers. But, the limited amount of AT1 issuance thus far in some countries such as India means investor appetite remains largely untested. Ultimately, the lack of local market depth and the size of the capital needed will mean issuers in China and India will need to tap the international markets with China's big banks leading the way given their size.
The issuance of loss absorbing capital securities should be positive for banks' capital positions but there are uncertainties for both the Chinese and Indian AT1 market. From a rating perspective Fitch assumes coupon omission - the first point of loss absorption - will be triggered when needed and the instruments would be rated in the single 'B' range. But there are some doubts with regard to the authorities' appetite to see investors actually absorb losses when a bank gets into trouble, particularly for more systemically important banks. If instruments are sold to retail investors, this may increase the level of moral hazard for regulators in these markets.
In China there is also lack of clarity over which regulator can declare a bank non-viable, resulting in investor uncertainty over the process to determine the point of non-viability (PONV).
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