Asian bank debt and shares fell on Monday after the wipeout of $17bn of Credit Suisse bonds in a takeover by UBS, sparking concern about similar debt and heralding further turmoil in European markets.
HSBC shares dropped 7.1 per cent in Hong Kong, while Standard Chartered slid 7.7 per cent and Bank of East Asia fell 4 per cent. Some bank bonds designed to absorb losses in the event of a banking failure suffered steep declines.
Swiss regulator Finma demanded on Sunday that SFr16bn ($17bn) of Credit Suisse’s additional tier one (AT1) bonds, a type of bank debt designed to take losses during a crisis, be written down to zero as part of the rescue deal with UBS.
Finma’s decision, taken as part of a frantic weekend of negotiations to broker a deal for Credit Suisse and prevent a spreading crisis, meant the bank’s AT1 debtholders lost more than its shareholders and cast doubt on the hierarchy of claims in the event of a banking failure. It was the biggest writedown so far of AT1 debt.
“It is a wake-up call to investors that AT1 bonds carry real risks of being written off in extreme scenarios, which is also the purpose of having such bonds,” said Gary Ng, senior economist at Natixis in Hong Kong. “The move will likely trigger some sell-offs and risk rebalancing from bond investors and wealth management product holders in Asia.”
DBS Group Holdings’s 3.3 per cent perpetual dollar note fell as much as 2.6 cents to 90.7 cents. Hong Kong lender Bank of East Asia’s 5.825 per cent dollar note fell as much as 8.5 cents to 81.7 cents, while Thailand’s Kasikornbank 4 per cent dollar note dropped as much as 4.5 cents to 80.6 cents.
Hundreds of billions of dollars worth of AT1 bonds were issued after the 2008 financial crisis as part of an international regulatory move to transfer the risk of bank failure to investors in bonds exposed to writedowns in a crisis.
They have so far rarely incurred losses, though in 2017, they were also written down as part of the failure of Banco Popular in Spain.
AT1s are usually owned by professional bond investors and hedge funds but are also popular among retail and wealth management investors in Asia.
An Asia fixed-income sales executive at a global investment bank said some investors were pulling out of AT1 debt altogether.
“It’s not what I would call a panic [but] what we are seeing in Asia today is investors looking at what happened over the weekend and working out whether they should treat AT1 debt as the same type of risk as before, and so some are just already saying they want to get out,” the executive said.
“This is an assessment that a lot of people are doing today — institutions, banks and private bank clients that all hold this.”
Asian stocks mostly opened lower. Japan’s Topix shed 1.5 per cent, while South Korea’s Kospi fell 0.7 per cent. Hong Kong’s Hang Seng index declined 3.4 per cent, and China’s CSI 300 lost 0.5 per cent.
Japan’s Topix Banks index was down 1.9 per cent and the Hang Seng Finance index shed 3.8 per cent.
US futures were down on Monday, with contracts for the S&P 500 and Nasdaq 100 down 0.3 per cent and 0.2 per cent, respectively.
European futures declined, with contracts for the FTSE 100 and Euro Stoxx 50 down 0.7 per cent and 0.7 per cent, respectively.
The yield on the 10-year US Treasury note shed 0.07 percentage points to 3.33 per cent. The yield on two-year note fell 0.14 percentage points to 3.69 per cent.
Additional reporting by Primrose Riordan in Hong Kong
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