1. Newsroom
  2. AT1s look attractive for investors today
Menu
UBP in the press 07.09.2020

AT1s look attractive for investors today

AT1s look attractive for investors today

Institutional Money (04.09.2020) - AT1s having benefited from the last decade’s banking reforms, the potential for attractive returns in this asset class could grow considerably in a stabilisation scenario.


Following the Great Financial Crisis of 2008/09, regulations such as Basel III were introduced to strengthen bank balance sheets and make the sector more resilient to exogenous shocks. An example of the effectiveness of these reforms is the much improved capital positions of European banks. The entire banking sector, and in particular systemic banks, hold significantly more capital today with Tier 1 Equity Ratios, a key measure of the strength of a bank’s balance sheet, at c. 13% for larger European financial institutions, more than double the level they were pre-2008. Similarly, recently enacted regulatory and governmental relief measures following the outbreak of Covid-19 should also act as a shock absorber for banks with reductions of countercyclical buffers, less stringent assessment of provisions and cancellation of equity dividend payments all helping to keep balance sheets strong and weather potential future storms.

Each of the steps taken to ringfence the banking system are positive for AT1s and keep the three risks specifically related to the asset class in check. Coupon Risk is the ability for AT1s to suspend coupons in times of acute stress. Although the ECB has recommended suspension of equity dividends until January 2021, this does not apply to AT1 coupons and the financial regulator has been clear in this regard. Retention of capital on a bank’s balance sheet instead of distributions to equity investors further strengthens the financial institution and is a clear positive for debt investors. AT1s are perpetual instruments with callability at set intervals.

As such, AT1s have Extension Risk in that the bonds may not be called by the issuer. Year-to-date, in spite of the significantly elevated market volatility, the vast majority of AT1s have been called. The two issuers that did not call their AT1 bonds had idiosyncratic reasons for doing so with neither having any adverse impact on the market. Finally, AT1s have what is labelled Trigger Risk. If the capital levels of a bank drop below a predefined level, the AT1 can become equity or be written down (permanently or temporarily). However, as discussed previously, banks are much better capitalised today than historically and we would expect that even in Lehman-like loss scenarios, large European banks would not see their AT1s fall below the respective trigger levels.

Beyond this favourable fundamental backdrop, AT1 spreads are close to their average levels since inception in 2013 and significantly above pre-Covid levels. Consequently, in a stabilisation scenario, the income level is attractive and should the spread tightening trend continue and yields fall to pre-Covid levels, the potential for capital gains (on top of income gains) from investing in AT1s is significant.

Global & Absolute Return Fixed Income

RENDU DE LINT Christel.jpg
Christel Rendu de Lint

Head of Fixed Income

Bernard-McGrath_150x150.jpg
Bernard McGrath

Senior Fixed Income Investment Specialist

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Le news più lette

UBP in the press 21.08.2020

Does private education generate positive impact?

Environmental Finance (14.08) - There is a strong argument for saying that private education has no place in impact investing because education is a basic public good that should be freely accessible to all. 

UBP in the press 12.05.2020

“UBP trusts in private markets, less correlated with traditional assets”

Monaco For Finance (23.04.2020) - Sérène El Masri was appointed Site Manager of UBP’s Monaco branch one year ago. Monaco For Finance spoke to her about her impressions of Monaco as a financial centre.

UBP in the press 27.05.2020

COVID-19 and Sustainable Investing

The Good Investment Review (04.2020) - Common allies or Incompatible bed fellows

Altro da leggere

UBP in the press 12.10.2020

The private banker’s metamorphosis

Le Temps (12.10.2020) - Few have been forced by their environment to go through such a deep professional change as private bankers. While relationship-building and advising remains their core role, their job today does not have much in common with what it was before the 2008 slump.

UBP in the press 09.10.2020

FRNs: an attractive medium-term opportunity

Institutional Money (08.09.2020) - FRNs offer an attractive risk/reward profile at the effective lower bound

UBP in the press 29.09.2020

Adrian Kuenzi: «I Wanted This Rupture»

Finews (28.09.2020) - Adrian Kuenzi has taken his next career step at Union Bancaire Privée, he told finews.com in an interview. The bank will keep investing, because the best of cost-cutting program won't help it win new clients.