Singapore comes of age with first foreign bank AT1

Singapore has not seen many bank capital trades this year, given that its lenders are some of the strongest and well capitalised in the world. The Lion City’s three major banks – DBS, OCBC and UOB – are all rated Aa1/AA-/AA-, a testament to their sound financial profile.

In fact, OCBC has been the only Singaporean bank to execute a bank capital trade this year, raising S$500m ($352m) from a 3.8% perpetual non call AT1 in August.

“Singapore is one of the early adopters of Basel III in Asia, so unlike some of the banks in other countries such as China, Singaporean banks started replacing old-style notes way back in 2013,” said a Singapore-based credit analyst.   

While domestic banks have little need to raise capital, the Singapore dollar bond market has still managed to record several transactions through the emergence of a different issuer base — foreign banks.

This year alone, Singapore has recorded four deals — ANZ, BPCE Group, Westpac and Julius Baer — raising a combined S$1.43bn, according to Dealogic. On the other hand, British lender Standard Chartered was the only overseas issuer last year, when it raised S$700m with a 4.4% 2026 tier two.

The rise of such foreign banks in Singapore is partly down to the trend of central banks around the world releasing liquidity to combat deflation, according to a Hong Kong-based financing solutions specialist. Singapore, for example, loosened its policies in January and October by slowing the Singapore dollar’s appreciation against a basket of currencies of its major trading partners.

“It’s all part of the monetary loosening trend that is happening right now, which has created an abundance of liquidity in a lot of domestic markets,” he added. “It’s creating a lot of arbitrage opportunities.”

An attractive cost of funding only tells part of the story. The financing solutions specialist said that an additional benefit for banks to issue in another currency is to avoid cannibalising liquidity in their own markets, especially if the pool is shallow to begin with.

“It’s hard for a single market to absorb all the issuance that could come from the transition to newer Basel regulations and TLAC [total loss absorbing capacity] rules,” he said. “Issuing overseas is one way to get around that and it also allows them to expand their investor base provided that pricing makes sense.”

Issuing in Singapore certainly worked for Julius Baer. The bank printed its S$450m perp non call five AT1 at a coupon and yield of 5.9%. Its existing Swiss franc-denominated AT1s, on the other hand, were trading around 7.2%-7.3% in Singapore dollar terms.

Even though pricing was a lot tighter than its outstanding AT1s, joint global co-ordinators Citi, DBS and UBS were still able to attract a S$1.8bn order book. This was because the new Julius Baer notes were a lot cheaper than comparable deals in the secondary market. AT1s from DBS, OCBC and UOB are all yielding around 3.8%-4%.

“For this deal we were really able to take advantage of the difference between the two markets and obtain the best result for the issuer ,” said a syndicate banker close to the deal.

While he agreed that the Singapore dollar market could provide a nice alternative for foreign banks to fulfil their capital requirements, there are many factors to consider.

One is liquidity, which can be prone to huge swings – a common characteristic of Asian local currency markets. But Singapore is still appealing because of the depth of its market.

“The Singapore dollar bond market is one of the deeper bond markets in Asia and the investor base is also the most international so to speak, which makes them more receptive to foreign credits,” the syndicate banker said. “Singapore has been slowly moving towards this for quite some time now, which is a sign that the market is starting to mature.”

Credit familiarity is also key for local investors as they are only comfortable with higher rated and better known foreign credits. Julius Baer, for instance, ticked those boxes given that it possesses an A3 rating. In addition, it also has a good Asian presence having bought Merrill Lynch’s international wealth management business in 2012.

Bank capital is a particularly attractive product for the city-state’s army of private bank investors as they are yield driven and not afraid to take longer tenor risks.

“Investors here like investment grade credits as well as high yields,” said a head of DCM. “The only way for the two sides to meet is through a subordinated perp.”

However, investors need to exercise caution when buying bank capital trades from banks outside their home country. This is because every jurisdiction has its own interpretation of Basel regulations, which means structures vary from one country to another.

Julius Baer’s AT1, for example, has a writedown trigger at a common equity tier one (CET1) ratio of 7%. Those issued by Singapore banks, however, do not have a hard trigger and are instead point of non-viability (PONV) instruments, which gives the central bank — the Monetary Authority of Singapore (MAS) — the discretion to decide whether the AT1s are to be written down.

“Unlike a conventional bond, which is purely about credit and pricing, you have to do a lot of investor education to make sure investors really understand the subtle differences in structure,” the DCM head said. “Underwriters need to exercise a lot of discipline in picking the right credit to bring out.”