Fitch: 2016 AT1 Issuance Suffers in Volatile Markets
Although prices have picked up this week, the sharp fall in prices of European bank AT1s in January and early February 2016 has driven up yields on these instruments, making them far more expensive to issue.
European Union regulation says that banks failing to meet their combined buffer requirements face restrictions on distributions and are subject to a maximum distributable amount (MDA) limitation. The restrictions apply to distribution of profit, payments in connection with common equity tier 1 (CET1), variable remunerations such as bonuses, discretionary pension contributions and AT1 instrument payments.
When a bank fails to meet or exceed its combined buffer requirements, it cannot distribute more than the MDA. If a bank breaches its combined buffer requirement due to a loss, we expect that there will be an automatic restriction on any discretionary payment, including payments on AT1 instruments.
For eurozone banks, the hurdle for determining whether a bank has breached its capital buffer requirements increased in January 2016 when the European Central Bank (ECB) confirmed that it will follow an opinion issued by the European Banking Authority (EBA) in December 2015. Pillar 2 capital requirements were brought into the equation, meaning that distributions cannot be made if Pillar 1, Pillar 2 and combined buffer requirements are breached.
The final outcome on coupon payment restrictions is uncertain because the EBA's opinion is that the European Commission should review the automatic prohibition on distributions relating to AT1 instruments when a bank makes no profit in a given year.
An increasing number of eurozone banks are disclosing their CET1 capital requirements following the 2015 ECB's supervisory review and evaluation process (SREP). The disclosed requirements range from 9.5% to 10.5% for banks that have issued Fitch-rated AT1 instruments. We expect the new SREP requirements for some banks to rise to a high of 12.5% by 2019 as global systemically important bank and systemic risk buffers are phased in.
The shift in regulatory buffers has had no immediate impact on our AT1 ratings because we consider the standalone financial profile, including financial flexibility of each bank and the actual and expected headroom above each issuer's combined buffer requirements remains consistent with the AT1 ratings. Extension risk is not factored into our ratings, but AT1 issuance is central to capital planning at many banks. Should AT1 pricing concerns persist and have a knock-on effect on the banks' capital-raising and broader funding strategies, this could impact the banks' ratings.