Asian banks are likely to remain major issuers of Additional Tier 1 (AT1) instruments in 2017, as Chinese banks look to support rapid balance sheet growth and Indian banks step up their efforts to address capital shortages, says Fitch Ratings.
Activity outside of these two large markets will be mostly driven by refinancing needs.
Asia's market share in Fitch's AT1 tracker - which tracks total global issuance since 2012 - increased to 40% at end-September 2016, from 31% at end-September 2015.
Asian banks were particularly active in the AT1 market in 3Q16, accounting for 63% of global issuance, mainly owing to large issuances by Chinese banks, totaling US$11.3 billion, and Japanese banks, totaling $5.4 billion. Chinese banks remain the biggest global market participants.
Fitch expects Asia to help drive global AT1 issuance again in 2017, with China likely to remain the largest global market participant.
“We are forecasting credit growth to exceed nominal GDP growth in China in 2017-2018, which, together with regulatory adjustments associated with off-balance-sheet wealth management activities, will need to be supported by extra capital,” says the ratings agency.
Chinese banks under pressure
Fitch also believes Chinese banks will be put under pressure to raise external capital by deteriorating asset quality - reflecting the build-up of financial system leverage in recent years.
The 15 commercial banks rated by Fitch have in total announced plans to issue CNY450bn ($65 billion) in capital by end-2018, and they could need to raise more than that.
Indian banks are likely to become more active in the AT1 market in 2017, after issuing around $2.8 billion so far in 2016. Fitch estimates that they need around $90 billion in extra capital by March 2019 to support credit growth and meet steadily increasing regulatory requirements.
Around one-third of this new capital is likely to be raised through AT1 issuance.
Driven by refinancing requirements
Most of the rest of Asia's AT1 activity is likely to be driven by refinancing requirements, rather than balance sheet growth or regulatory pressure. Fitch expects the three Japanese mega banks to be the largest market participants in the region, outside of China and India.
Asian banks in 2016 issued most of their AT1 instruments in domestic markets, where the relative cost of funding has become more favorable. These local-currency instruments also allow for better matching of the banks' risk-weighted assets.
Banks are likely to continue to favor domestic issuance in local currency next year, given the recent strength of the US dollar and the likelihood that the US Federal Reserve will raise interest rates further.
The scope to rely on domestic markets for issuance varies by country. China's domestic market, for example, has so far proved deep enough to meet banks' requirements.
“However, we believe the Indian domestic market is unlikely to show the same sort of depth, and we have doubts that it will be able to absorb all of India's AT1 paper.
“We expect Indian banks to continue to favor domestic issuance in the short term - given the cost advantage - but some of the better-rated banks are likely to be encouraged to follow the example set by State Bank of India in 2016 and turn to the international market next year.”