(The following statement was released by the rating agency)
LONDON, November 13 (Fitch) Most European investors consider there to be several
challenges to investing in Basel III-compliant capital instruments, according to
a Fitch Ratings quarterly investor survey conducted in October. The key ones
arise from regulatory uncertainty.
The two main issues identified by survey participants were the influence on
non-performance of regulatory and model risk, and uncertainty about
loss-absorption trigger points, including the definition of 'point of
non-viability' (PONV); 48% of investors highlighted the first issue and 42% the
second. Of less concern, but still meaningful, were the issues of mandate
restrictions, inadequate pricing of risks and secondary market liquidity.
A bank could be restricted from making coupon payments on additional tier one
(AT1) securities if changes in capital buffers, requirements or risk weights
imposed by European regulators cause a breach of its combined capital buffer
requirements. These regulatory and model risks amplify uncertainties for
Fitch believes the most easily activated form of loss-absorption is the
non-payment of interest on AT1 securities, making it the key rating driver for
such instruments. Unless a bank were to suffer a very substantial and sudden
loss, coupon omission would be likely well before an equity conversion or
write-down trigger is hit, based on the levels of these triggers in the handful
of European bank AT1 deals launched so far.
Regulatory and model risk is of lower concern in Asia-Pacific at present because
the banks have relatively comfortable capital ratios, which are less affected by
Basel III changes due to their simpler structures, meaning that there has been
less focus on additional capital buffers. But Asia-Pacific investors were more
concerned about the PONV; and in our investor survey for the region published
last month, foresaw more challenges with market liquidity and pricing than
European investors. Pricing and liquidity in Asia is being distorted by the
involvement of private bankers and the influence of private or retail investors
attracted to these securities in the low-interest environment.
Investor uncertainty about PONV has arisen because regulators have not always
defined what events would trigger it, and there may be a fair amount of
judgement in the decision for Tier 2 instruments. There may also be more than
one authority involved if a bank has substantial operations in multiple markets,
which could complicate the process.
Fitch's Q413 survey closed on 4 November. It represents the views of managers of
an estimated EUR7trn of fixed-income assets. We will publish the full results
Credit Market Research
+44 20 3530 1060
Fitch Ratings Limited
30 North Colonnade
+44 20 3530 1076
+44 20 3530 1655
Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email:
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Assessing and Rating Bank Subordinated and Hybrid Securities
APAC Senior Fixed-Income Investor Survey 2013
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
Copyright Thomson Reuters 2013. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.