Reuters: Bankruptcy News: EM bank capital volumes outstrip Europe

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EM bank capital volumes outstrip Europe Oct 12th 2012, 09:24 By Sudip Roy and Helene Durand Fri Oct 12, 2012 5:24am EDT LONDON, Oct 12 (IFR) - Banks in emerging markets have issued more capital boosting instruments than their Western European counterparts for the first time as they seek to get ahead of forthcoming changes to their regulatory environment. Issuance volumes of Tier 1 and Tier 2 securities by emerging markets banks for 2012 stood at USD27.2bn as of October 8, according to Thomson Reuters data, compared with USD19.5bn raised by Western European lenders. Institutions in Asia and Latin America have led the charge, issuing USD22.6bn, while Russian banks account for all of the USD4.6bn raised by CEEMEA lenders. Bankers say that there is plenty more to come, with Turkey's Isbank about to start roadshowing a deal and South African banks also looking to join the party. "Investors love emerging markets credits as they have nothing to do with the eurozone crisis and this is a major draw for investors," said Gerald Podobnik, head of capital solutions at Deutsche Bank. "Also, a lot of these banking systems have had their crisis before and the banks are therefore now very well-capitalised." The relative dearth of issuance from European banks is in stark contrast to five years ago, when they raised more than USD75bn of capital. But regulatory paralysis, combined with higher issuance costs of bank capital instruments, as well as deleveraging, have disincentivised the region's lenders. Instead, emerging markets banks have taken up the baton, spurred by the shifting regulatory environment, growing balance sheets and attractive pricing dynamics. "Traditional old-style Tier 2 has so far been the instrument of choice for growth market banks," said Kapil Damani, senior capital structurer at BNP Paribas. He added that lenders have rushed to sell these instruments before Basel's proposed cut-off date so that they are eligible for grandfathering ahead of Basel III requirements for non-viability loss absorption, which may make future issuance more expensive. For example, in Brazil and India old-style Tier 2 instruments will be made redundant after December 31, while in Russia a cut-off date during the second quarter has been proposed by the central bank in its recent Basel III consultation. THE PRICE IS RIGHT Attractive pricing is another reason behind the spurt in issuance. "What's staggering is that the differential between senior and subordinated paper is so small in the emerging markets compared with Western Europe," said Nick Darrant, head of CEEMEA syndicate at BNP Paribas. "It's a reflection of healthier balance sheets and market dynamics." Recent Tier 2 deals from Russia, including those by VTB and Alfa Bank, have traded well inside 100bp difference between the two curves, driven by investors' search for yield. Private banks have provided the anchor bid for Tier 2 deals, though in the case of VTB, institutional investors were key participants too, taking the view that the bonds were essentially senior debt with a pick up. Even the new-style capital instruments issued by VTB and Banco do Brasil, which have both issued hybrid Tier 1 securities, are trading at relatively more favourable levels than their Western counterparts. The difference between Banco do Brasil's USD1.75bn 9.25% perp non-call 2023 note and an earlier USD1.5bn 8.5% perp non-call 2020 is about 85bp, for example. Meanwhile, the difference between old-style and new style Tier 1 qualifying instruments issued by Macquarie is 130bp, while for UBS it is about 300bp. HERE TO STAY Market players said emerging market lenders will remain an important feature of the bank capital market. Take Asia for example. To comply with the Basel Committee's guidance that 1.5% of a bank's balance sheet should comprise Tier 1 instruments and 2% in Tier 2, Asian lenders need to issue USD36bn of the former and USD48bn of the latter. Looking at the most recent reported regulatory capital ratios for a sample of banks, Tier 2 capital is roughly 4% of risk-weighted assets for growth markets banks, according to Damani, compared with 2.3% for Western European banks. However, Tier 1 accounts for only 0.9% of growth markets banks' balance sheets compared with 1.8% for Western European lenders. But expectations are that this will change and more emerging markets banks will do similar deals to VTB's and Banco do Brazil's hybrid Tier 1 offerings. For instance, Gazprombank has announced its intention to issue a perpetual, though its transaction will not have the substitution language of VTB's and BdB's deals. "The next generation of capital issuance will be more structured. There's a new world out there but it awaits greater clarity," said Richard Luddington, vice-chairman of global capital markets at UBS. Bankers also believe hybrid Tier 1 volumes in Europe will ramp up as soon as regulatory clarity emerges. Meanwhile, a wave of Tier 2 issuance has seen European banks play catch up and raise USD8bn equivalent in recent weeks. (Reporting by Sudip Roy and Helene Durand; Editing by Matthew Davies) Link this Share this Digg this Email Reprints

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