Friday 09 Jun 2023
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(March 20): Shares of European banks traded in Asia tumbled on Monday, as investors weighed a collapse in the value of additional tier 1 bonds issued by lenders following the terms of the Credit Suisse Group AG’s rescue.

HSBC Holdings plc shares closed 6.2% lower, the biggest drop in nearly six months, with its newly issued AT1 bond dropping by more than 5 cents. Standard Chartered plc ended the session down 7.3%. The broader Hang Seng Index slid 2.7%.

The complete write-down of Credit Suisse’s AT1 debt as part of a Swiss bailout has investors in the US$275 billion market scrambling to determine how much protection the notes offer in a crisis. The repercussions can be twofold, with banks such as HSBC potentially needing to find new sources of capital if there’s a loss of confidence while their holdings of such debt issued by peers may see a significant loss of value.

A spokesman for the bank declined to comment.

“What is certain is that there will be ripple effect from the Credit Suisse deal to the bond and equity market and we don’t know yet how much exposure international and regional banks have,” said Dickie Wong, director of research at Kingston Securities Ltd.

In a sign of contagion, some Asian banks’ AT1 bonds, which are deemed as the riskiest bank securities, fell by a record. Bank of East Asia Ltd’s 5.825% perpetual dollar note slumped 8.6 cents to 79.7 cents, which would be a record decline if maintained through the end of Monday’s trading, according to data compiled by Bloomberg.

Additional Tier 1 notes were created after the Global Financial Crisis to ensure that losses in times of crises would be borne by investors, rather than taxpayers bailing out borrowers.

“The Credit Suisse deal has left some bondholders with significant losses and investors in the region may be reexamining exposure to financial market turmoil and tail risks,” said Marvin Chen, analyst at Bloomberg Intelligence.

Vital Knowledge said in a note that while UBS Group AG agreeing to buy Credit Suisse will make the entire financial system stronger and more stable, the AT1 bond write-off could “spook holders of these types of securities at other banks”.  

The Hong Kong Monetary Authority said on Monday that exposures of the local banking sector and market to Credit Suisse are insignificant.

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