Asian bank debt and shares fell on Monday after Credit Suisse scrapped $17bn of bonds in a takeover by UBS, fueling concerns about similar debt and hinting at turmoil in European markets.
HSBC shares fell 7.1 percent in Hong Kong, while Standard Chartered fell 7.7 percent and East Asian Bank fell 4 percent. Some bank bonds that were designed to absorb losses in the event of a banking failure experienced a drastic decline.
Swiss regulator Finma demanded on Friday that SFr16bn ($17bn) of Credit Suisse’s additional tier one (AT1) bonds, a type of bank debt designed to absorb losses during the crisis, were written down to zero as part of a rescue deal with UBS.
Finma’s decision, taken as part of a weekend of frantic negotiations to broker a deal for Credit Suisse and prevent a widespread crisis, obviously AT1 bank debtors lost more than shareholders and cast doubt on the hierarchy of claims in the event of banking failure. . This is the largest number of AT1 loans to date.
“It’s a wake-up call for investors that AT1 bonds carry a real risk of being wiped out in an extreme scenario, which is also the purpose of having such bonds,” said Gary Ng, senior economist at Natixis in Hong Kong. “The move will lead to some selling and risk rebalancing by bond investors and holders of wealth management products in Asia.”
DBS Group Holdings’ 3.3 percent perpetual dollar notes fell 2.6 sen to 90.7 sen. Hong Kong Bank of East Asia’s 5.825 percent dollar note fell by 8.5 sen to 81.7 sen, while Thailand’s Kasikornbank’s 4 percent dollar note fell by 4.5 sen to 80.6 sen.
Hundreds of billions of dollars of AT1 bonds were issued after the 2008 financial crisis as part of international regulatory measures to transfer the risk of bank failure to investors in bonds subject to writedowns in the crisis.
He has so far rarely experienced losses, although in 2017 he was also written off as part of the failure of Banco Popular in Spain.
AT1 is mostly owned by professional bond investors and hedge funds but is also popular among retail investors and wealth managers in Asia.
An Asian fixed-income sales executive at a global investment bank said some investors are pulling AT1 debt entirely.
“This is not what I call panic [but] what we’re seeing in Asia now is that investors are looking at what happened over the weekend and figuring out whether they should treat AT1 debt as the same type of risk as before, so some are saying they want to get out,” the executive said.
“This is an assessment that many people are making today – institutions, banks and private bank clients who all have this.”
Asian stocks typically opened lower. Japan’s Topix shed 1.5 percent, while South Korea’s Kospi fell 0.7 percent. Hong Kong’s Hang Seng Index fell 3.4 percent, and China’s CSI 300 lost 0.5 percent.
Japan’s Topix Banks index fell 1.9 percent and the Hang Seng Finance index fell 3.8 percent.
US futures were lower on Monday, with contracts for the S&P 500 and Nasdaq 100 down 0.3 percent and 0.2 percent, respectively.
European futures declined, with contracts for the FTSE 100 and Euro Stoxx 50 down 0.7 percent and 0.7 percent respectively.
The yield on the 10-year US Treasury note dropped 0.07 percentage points to 3.33 percent. The yield on two-year notes fell 0.14 percentage points to 3.69 percent.
Additional reporting by Primrose Riordan in Hong Kong