If the shotgun marriage between financial giants UBS and Credit Suisse was meant to achieve one thing, it was to maintain confidence in the global banking system.
“In coming days, the market will be rightly asking whether the risks have been adequately priced into domestic subordinated bank bonds,” says Amy Xie Patrick, head of income strategies at fund manager Pendal. “At the very least, the premium investors will demand of the next hybrid bond to be issued in Australia ought to be higher.”On Monday AEDT, global investment bank UBS agreed to buy its besieged 167-year-old rival Credit Suisse in a rescue package brokered by regulators.
“The extreme scenario is investors become so untrusting of AT1s that they don’t want to buy them or only buy them if it’s offering a higher return than even equity. Australia’s $43 billion worth of hybrid capital is almost entirely held by retail investors, largely because of the franking component and dearth of liquidity,As to whether ASX hybrid holders could get wiped out in the same manner as Credit Suisse AT1 holders, experts universally agree that Australian hybrid holders rank above ordinary shareholders.
“Australian major banks maintain high common equity tier one ratios of between 11-12 per cent. Looking specifically at CBA, factoring in an extreme downside scenario of a 30 per cent decline in house prices and all mortgages above an 80 per cent LVR defaulting only reduces CET1 by between ~2-2.5 per cent to ~9 per cent. This is well above AT1 conversion triggers of 5.125 per cent.”So, everything is hunky-dory, right? Well, not quite.
The ruptures overseas this week could moderately shift that assessment, but he says risk diversification is critical.“A lot of these hybrid holders will have their savings in one of the big four banks, they will own big four bank equity, they may also have a mortgage with them,” he says. However, some are unconvinced of the merits of hybrids for retail investors. Steward Wealth director James Weir says the complexities are too great – hybrid product disclosures often exceed 150 pages – a view that predates the Credit Suisse crisis.
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Source: SkyNewsAust - 🏆 7. / 78 Read more »