HONG KONG: Asian lenders may find it difficult to replenish their capital by issuing Additional Tier-1 (AT1) bonds, Citigroup says after the Swiss authorities move to wipe out Credit Suisse bonds as part of its takeover deal.

The challenge will be particularly acute for a large number of smaller banks in Asia that are more reliant on AT1s compared with their Western peers due to tighter regulatory liquidity requirements.

Under the takeover deal, the Swiss regulator determined that Credit Suisse’s AT1 bonds, with a notional value of 16 billion francs (US$17.35bil or RM77.5bil) would be wiped out, a decision that stunned global credit markets and angered many holders.

AT1 bonds can be converted to equity and rank higher than shares in the capital structure of a bank.

If a bank runs into trouble, bondholders will usually come before shareholders in terms of getting their money back.

The write-down to zero at Credit Suisse will produce the largest loss in the US$275bil AT1 market to date.

Citi said in its note that it expected the Credit Suisse fallout to trigger a re-pricing of AT1 across Asian banks’ capital structures.

Asian banks “more reliant on AT1 may face increasing difficulty replenishing capital”, which in turn may slow their pace of balance sheet expansion and help tame the inflation outlook and rate hike pace.

“Regulators may tighten capital and liquidity requirements, which may impact smaller banks more,” Citi said in the research note.

Citi, however, said the Credit Suisse move was unlikely to undermine the broader AT1 market in Asia in the long term.

 - Reuters