Singapore a capital-raising hotspot for European banks

Singapore

SINGAPORE has become the go-to market in Asia for European banks needing to beef up their capital to comply with regulatory requirements.

So far this year European banks have sold almost S$3 billion of debt in the Singapore dollar bond market, up from S$850 million in 2015.

A convergence of factors such as a deep market and a competitive swap market has made Singapore the Asian capital for European banks to issue debt, especially Additional Tier 1 capital instruments (AT1) like perpetual or hybrid bonds.

"The two key reasons are investor and market diversification, as well as pricing arbitrage which translates into cost savings," said Valerie Lee, Standard Chartered Bank executive director, bond syndicate.

Ms Lee was responding to queries from The Business Times on why European banks have been making a beeline to Singapore for their funding needs.

In the past three months, three European banks - French bank Societe-Generale, Swiss bank Credit Suisse and UK-based Standard Chartered PLC - each inked mega perpetuals of S$750 million, snapped up by mainly private bank clients.

In the first six months of 2019, European banks raised S$2.825 billion, of which AT1 accounted for S$2.25 billion. This already exceeds the amount for the whole of 2018 which was S$1.95 billion, including S$1.45 billion of AT1.

In 2015, issues by European banks totalled S$850 million, with S$450 million of AT1.

"Beyond the three major currency markets (USD, EUR and GBP), the SGD market has emerged to become the fourth largest for AT1 capital globally, and the only Asian currency market which offers international banks the opportunity to raise benchmark-sized AT1 capital at highly competitive spreads," said Ms Lee.

AT1 instruments are perpetual, that is securities with no fixed maturity, and are deeply subordinated, ranking senior only to equity or common shares. One of the conditions for an instrument to qualify as AT1 capital is that it is perpetual. AT1 instruments include issuer call options, usually, every five years. That means the issuer has the right but not the obligation to redeem the perpetuals.

The after-swap pricing arbitrage on recent deals has ranged from 40-85 basis points, which is very significant when considered over the life of an AT1 instrument, Ms Lee said.

Last month's StanChart's inaugural Singapore dollar AT1 of S$750 million 5.375 per cent received orders of S$2.7 billion. The strong investor response allowed the bank to tighten the coupon from an initial price guidance of 5.75 per cent.

At 5.375 per cent, this was the lowest coupon of any SGD AT1 issued since September 2018 and represents an arbitrage of about 85 basis points versus an equivalent AT1 trade from StanChart in the USD market, she said. "This is the largest arbitrage achieved by a European bank in the SGD AT1 market and equates to an effective coupon cost saving of US$23 million over the first 5 years," Ms Lee said.

According to Clifford Lee, DBS Bank head of fixed income, the swap market is very favourable to foreign bank issuances at the moment, a critical factor driving European bank deals here. Over the years, the SGD bond market has proven itself adequately developed to accommodate foreign issuers once the market conditions suit both issuers and investors.

"The SGD cross currency swap rates are currently favourable for such bank capital issuances from recognized foreign issuers in the SGD bond market; the growing market acceptance that interest rates will stay low, and go even lower, has made bonds more attractive as an asset class," said Mr Lee.

Also, "hybrid bank capital issues from stronger banks provide investors with the unique balance of the credit comfort of a strong underlying issuer and the higher yield of a subordinated instrument," said Mr Lee. Private bank clients hungry for yield are the biggest investors for bank perpetuals given their relatively higher coupon rates and this is a global trend, seen also in the USD market, he said.

Singapore private bank clients need not fret if they've missed previous deals as more supply is expected - as long as the swap market remains favourable.

StanChart's Ms Lee said there is US$35 billion of AT1 reaching first call dates over the next 18 months so supply is expected to weigh on the market, driving a real need for market diversification. "The SGD market offers a unique, discrete capital pool for AT1 and is home to a large private bank investor base with a natural appetite for higher yielding bank debt," she said.

Asian private banks have been one of the largest and most consistent buyers of bank subordinated debt, she noted.

"We are hopeful to bring more of such issues to the Singapore market to meet investors' needs for the rest of the year," added DBS' Mr Lee.