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 fell 6 per cent in Hong Kong, while Standard Chartered fell 5 per cent and Bank of East Asia fell 3.5 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 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 meant AT1 debtholders lost more than Credit Suisse 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 80.7 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.
Asian stocks mostly opened lower. Japan’s Topix shed 1.2 per cent in morning trading, while South Korea’s Kospi fell 0.5 per cent. Hong Kong’s Hang Seng index declined 2.6 per cent, and China’s CSI 300 gained 0.1 per cent. Japan’s Topix Banks index was down 1.8 per cent.
Shares in Japan’s three major banking groups — Mitsubishi UFJ Financial Group, Mizuho and Sumitomo Mitsui Financial Group — all logged small gains at the open but reversed them later in the morning.
US futures pointed higher on Monday following news of the Credit Suisse deal, with contracts for the S&P 500 and Nasdaq 100 up 0.7 per cent and 0.5 per cent, respectively.
The yen, which began climbing against the dollar last week on speculation around the falling likelihood of further US Fed rate increases, traded quietly in early Monday trading, falling 0.3 per cent to ¥132.21 per dollar.
Additional reporting by Primrose Riordan in Hong Kong