Asia - More hybrid securities seen in Asia-Pacific on stricter capital rules

Banks in Asia Pacific are expected to issue more hybrid securities, to maintain their capital ratios above regulatory requirements in the next few years, said Standard & Poors Ratings Services.

In a new report "Stricter Capital Rules To Spur Asia-Pacific Banks’ Hybrid Issuance, Although Challenges Loom", the rating agency noted that major Asia-Pacific countries have implemented Basel III capital reforms in 2013 as planned, and some including China, Australia, Singapore and India have applied more stringent requirements than those that the Basel Committee on Banking Supervision (BCBS) recommends.

"However, we expect banks to come under stronger pressure to keep higher capital ratios than the regulatory requirements in the next few years. Some countries’ regulators may opt for more stringent guidelines than those of the BCBS," S&P said.

The minimum capital requirement will be raised in phases during 2013-2019. As most rated banks’ Common Tier 1 (CET1) capital ratios are already sufficient in the range of 8-14 per cent, Standard & Poor’s Ratings Services expects them to be able to comply with the new capital requirements without significant difficulty.

The banks  may raise the minimum ratios by introducing additional charges for domestically systemically important banks (D-SIBs) or counter-cyclical buffers.

Banks with global operations could face stronger pressure to enhance their capitalisation - for instance, global systemically important banks (G-SIBs) may need to have additional capital buffers.

In addition, banks in emerging economies such as China and India may constantly need to replenish capital to support asset growth. For banks in saturated markets, including Japan, Korea, and Taiwan, low profitability could limit significant improvement in their capital ratios.

"In our view, tougher capital rules will spur banks to enhance capitalisation and protect them from risks associated with excess credit growth and asset inflation.

On the other hand, higher capital charges could potentially constrain lending capacity and economic growth unless banks are sufficiently capitalised or well positioned to raise new capital through securities issuance."

Major banks in Australia, Singapore, Korea, and Japan have started to issue hybrid capital that meet Basel III requirements. These issues carry small risk premiums compared with existing hybrid securities.

Such risk, however, is underpinned by the stability of global financial markets as well as the solid credit profiles of the issuers in those countries. At the same time, banks in high-growth countries such as India and China are poised to venture into both the domestic and global markets for Tier 1 and Tier 2 securities.

S&P considered that they will face more challenges to tap the global market, given their limited track record of cross-border issuance of capital instruments and relatively low stand-alone credit profiles (SACP) compared to those in developed markets.

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