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Europe's banks head to Asia amid US$1 trillion capital shortfall
[LONDON] European banks are heading to Asia for capital as new rules at home demand they sell more than US$1 trillion of equity and subordinated debt to increase loss buffers.
French and German lenders have sold the equivalent of US$1.8 billion in notes that act as a cushion in case of insolvency this year, in denominations from the Chinese yuan to the Japanese yen. Before this year, they'd issued none. Dutch and Italian banks that began issuing in the region in 2012 have also stepped up activity.
Financial institutions are turning to Asia, where there's ample cash to buy large amounts of securities and pricing is attractive, after money managers in Europe gorged on about US$266 billion of subordinated debt in either dollars or euros since 2008. The move East is poised to accelerate as banks still need to issue about four times that amount.
"In anticipation of higher capital issuance requirements it makes sense to diversify funding sources," Alexandra MacMahon, the head of Europe, Middle East and Africa financial institutions debt capital markets at Citigroup Global Markets Ltd. in London, said by phone June 12. There's much more of a focus on expanding the investor base, "something we hadn't seen so strongly in a number of years," she said.
European banks have US$447.2 billion of subordinated notes that will stop counting toward their capital buffers in coming years, according to Bloomberg-compiled data. Those securities may have to be replaced by new ones that comply with Basel III rules, which, in addition to other requirements under discussion, could bring the total amount to be issued to $1 trillion, Singapore-based Ivan Vatchkov, the chief investment officer at Algebris Investments Ltd., a hedge fund that focuses on bank capital, said in a June 17 interview.
"You don't want to inundate your home market," Kazuhide Tanaka, the head of long-term funding for Rabobank NA in Tokyo, said. "So you look at diversifying your pool of investors and that means going to Asian currencies." Rabobank had a capital ratio of 21.3 percent at the end of 2014, more than double the minimum required by regulators. The lender is the biggest issuer in Japan's Samurai market and in December sold 50.8 billion yen (S$550.7 million) of subordinated bonds that count toward what's known as Tier 2 capital, the first such issue by a foreign bank.
The Dutch lender may become the second from its continent to issue Tier 2 notes denominated in Australian dollars, according to an e-mailed statement from National Australia Bank Ltd. In May, Societe Generale SA sold the equivalent of US$97.5 million of such debt in the so-called Kangaroo market.
The French bank's cost to issue capital in dollars is on the rise. It paid a yield premium of 255 basis points more than Treasuries for a 10-year 4.25 per cent US currency note in April. That's 30 basis points more than the 225 basis-point spread Societe Generale paid for a similar tenor note in January 2014. That bond pays a coupon of 5 per cent, more than double the 2.195 per cent on one of the lender's Samurai subordinated securities sold in June.
"You get attractive pricing" in Asian currencies, Andrew Stephen, the head of Asia private placements and local currency debt at Deutsche Bank AG in Singapore, said. "And Asia has sophisticated investors who understand bank capital." In April, Deutsche Bank became the third European lender to sell subordinated notes in the offshore yuan market, trailing France's BNP Paribas SA and BPCE SA. The latter has raised a total of US$643.4 million selling Tier 2 bonds in yen, yuan and Singapore dollars.
"Most issuers are increasingly aware of the Asian market and that liquidity here is extremely healthy," Clifford Lee, the Singapore-based head of fixed income at DBS Bank Ltd, said. "The Singapore market has proven to accommodate size and tenor." Such transactions are just the start, especially as European lenders look to alternative funding pools for their regulatory needs, Algebris Investments' Vatchkov said.
"Finding stable pools of liquidity is absolutely critical," he said. "Banks can't depend on only one funding avenue anymore."