One trader said a seller dumped an Australian bank hybrid into the institutional market at a 10 per cent discount to Friday’s level, while tier one securities issued by HSBC traded as much as 9 percentage points lower than Friday’s close in a volatile session for Asian markets.
Hybrids have debt-like characteristics in that they pay regular income, and equity-like characteristics in that the securities can be converted to ordinary shares or written down to zero in certain scenarios.
As institutional traders marked hybrid securities lower, prices of ASX-listed bank hybrids were relatively unchanged as major bank shares slipped a modest 0.6 per cent.
Analysts said Australia’s banking system was more robust and better regulated, which bodes well for holders of ASX-listed bank hybrids, and the extent of any related selling could provide buying opportunities.
“The strength of Australian banks and prudential regulation remain comparatively superior on any serious comparison to similar world entities,” said BondAdviser portfolio manager said Nicholas Chaplin.
“Looking at the takeover of Credit Suisse – a bank that has suffered multiple crises over numerous years, it is incredible to think how management lit the fires, but the Swiss regulator blew on those flames by effectively doing nothing despite enormous losses for the bank in recent years,” Mr Chaplin said.
Pendal’s head of income strategies, Amy Xie Patrick, said the Credit Suisse wipeout was “a wake-up call for parallel assets in Australia”.
“Over the next few days, the market will be asking, and rightly so, whether the risks have been adequately priced in to domestic subordinated bank bonds,” she said. “At the very least, the premium investors will demand of the next hybrid bond to be issued in Australia ought to be higher.”
Choppy session
One key difference between Australian bank hybrids and those issued by the Swiss banks is that the Australian securities convert into equity, rather than being written off entirely.
Another credit investor said the actions of Swiss regulators could ultimately make it harder for its banks to issue tier one securities in the future, and may have ramifications for the cost of bank capital.
“No one really knows how this is going to end up,” the trader said, ahead of what was shaping up to be a choppy European session.
Additional tier one securities are desirable for the regular income they pay to holders, but those distributions can be halted in certain circumstances. After the global financial crisis, banks considered too big to fail were forced to bolster their capital buffers to reduce the cost and likelihood of a taxpayer bailout.
On Monday, Reserve Bank assistant governor Chris Kent underlined the role of bank hybrids in protecting depositors.
“They’re an important part of the instruments that APRA [Australian Prudential Regulation Authority] has asked to raise to make sure they are unquestionably strong, and banks have [raised] plenty of those,” Dr Kent said.