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[HONG KONG] The appetite of China's wealthy to diversify from a weakening yuan is helping European finance companies boost capital to prepare for the next financial crisis. Global fund managers are urging caution.
Since Aug 1, seven issuers opened order books for their Basel III bond sales in Asian hours, raising US$11.9 billion selling instruments that count as capital under Basel III rules. HSBC Holdings Plc separately issued US$2 billion of total loss-absorbing capacity notes in Taiwan. In the first seven months, only three such deals opened in Asia.
Asia's high net-worth individuals, whose wealth has surpassed counterparts in North America, have been major investors in regional bank bonds, slashing yields. They are turning to Europe even as a rout in shares of lenders including Deutsche Bank AG worsens.
Hybrid issues with low, fixed coupons face downside risk from rising US Treasury yields, according to JPMorgan Chase & Co.
"Asian investors tend to be more yield hungry and willing to take higher risks," said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong.
While they tend to focus on European banks with strong retail franchises, they "are getting complacent" when it comes to insurer bonds, he said.
German insurer Allianz SE sold US$1.5 billion of Tier 2 perpetual notes in August to yield 3.875 per cent with the coupon fixed for life.
Commerzbank AG says the higher returns promised by European banks come with greater risk amid low lending margins. Additional Tier 1 notes sold by European issuers in 2016 pay an average coupon of 6.6 per cent, compared with 3.9 per cent for Asia, Bloomberg-compiled data show.
London-based Standard Chartered Plc sold US$2 billion AT1 notes to yield 7.5 per cent last month, with 31 per cent going to Asian investors. Zurich-based UBS Group AG sold similar debt at 7.125 per cent. By contrast, Singapore's DBS Group Holdings Ltd sold notes at 3.6 per cent.
"Asian bank debts are safer because governments may bail them out before AT1 investors suffer losses, while European governments are much less likely to do so," said He Xuanlai, credit analyst at Commerzbank in Singapore. "I don't think all investors buying into Europe hybrid bank bonds do extensive research."
Noah Holdings Ltd said wealthy Chinese investors' demand for overseas assets may grow as much as 20 per cent next year as they diversify from a yuan that dropped 4.6 per cent in the past year. Australian issuers such as Westpac Banking Corp are also making Asian investors their first ports of call.
"This trend has just started and is targeting a broader range of investors, including private banks and wealth management funds, that are looking for yields," said Clifford Lee, head of fixed income at DBS in Singapore.
Deutsche Bank's 7.5 per cent AT1 notes dived to a record low 72 US cents on Feb 9, after it posted its first full-year loss since 2008. Its shares have tumbled 47 per cent this year.
"We really don't like European banks," said Donald Amstad, a director at Aberdeen Asset Management Asia Ltd. "The European Central Bank's quantitative easing has caused bond yields to collapse. Banking in Europe, already an unprofitable business, is now under further pressure."
Profits for the 10 biggest European banks shrank 18 per cent in the most-recent 12 months, compared with a 5.2 per cent decline for the top 10 lenders in Asia excluding Japan. European banks sold US$22.6 billion Basel III notes since August, up 43 per cent from the year-earlier period.
"If you are the treasurer of the bank, you need to find buyers of your debt and Asia is savings rich," Mr Amstad said.
"But our approach to lending money to European banks is incredibly cautious."