SG banks strong and stable despite uncertain AT-1 issuance market - experts

They may face higher funding costs as lenders could demand higher risk premiums on AT-1 papers.

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Singapore banks have a stronger resilience compared to their Asian counterparts, so experts say. But just how strong they are and how easily they adapt to global banking crises are occasionally put to the test.

The zero write-off of Credit Suisse’s Additional Tier-1 (AT-1) bonds presented concerns over the impact of AT-1 bond losses on global banks. Although Asian banks are less likely to be dramatically affected, it pays to see how and why Singapore banks stand in the wind.

Credit Suisse’s AT1 write-down 

AT-1 bonds are a type of hybrid debt that can be converted into equity if a predetermined event occurs, acting as an additional capital and buffer for banks. That’s why Credit Suisse’s $17-billion write-down of AT-1 notes early this year caused such a stir in the industry.

The “Lion City” has been marked to have a lesser chance of following in the footsteps of the AT-1 writedown of the Swiss bank, according to Gary Ng, senior economist at Natixis Corporate & Investment Banking.

“Singaporean banks have higher ratings than Asian peers with minor AT-1 bond price movement and low reliance on AT-1, and therefore the impact is limited to credit ratings. Based on our calculation, DBS and OCBC’s AT-1 to Common Equity Tier 1 (CET 1) ratio is around 5%, lower than the average level of 14% in Asia,” Ng told Asian Banking and Finance.

He emphasised that Singapore’s AT-1 bond coupon rate is one of the lowest in the region at 3.6%. Thus, a slight increase would not have a great impact on general funding costs.