HONG KONG Reuters -- Asian lenders may find it hard to replenish their capital by issuing Additional Tier 1 AT 1 bonds, Citigroup said on Wednesday, after the Swiss authorities decided to wipe out Credit Suisse bonds as part of its takeover deal.
The challenge will be especially acute for a large number of smaller banks in Asia who are more dependent on AT 1 s than Western peers due to tighter regulatory requirements.
Under the takeover deal, the Swiss regulators determined that Credit Suisse's AT 1 bonds with a notional value of 16 billion francs $17.35 billion would be wiped out, a decision that shocked global credit markets and angered many holders.
The bonds at 1 that can be converted to equity rank higher than the shares in the capital structure of a bank. Bondholders will usually come before shareholders if a bank gets their money back, if they get their money back.
The write-down at Credit Suisse will result in the largest loss in the $275 billion AT 1 market to date.
Citi believes that the Credit Suisse fallout will cause a repricing of AT 1 across Asian banks' capital structures.
Asian banks more reliant on AT 1 may face difficulty replenishing capital, which may slow their pace of balance sheet expansion and help tame the inflation outlook and rate hike pace.
Citi said in the research note that regulators may tighten capital and liquidity requirements, which could affect smaller banks more.
Citi said that the Credit Suisse move was unlikely to undermine the broader AT 1 market in Asia in the long term, as the terms and conditions of such instruments offer greater investor protections across the region.