The Swiss regulator’s decision to wipe out Credit Suisse AT1 bondholders ahead of shareholders is likely to lead to higher borrowing costs for Irish banks, along with European peers.
AIB, Bank of Ireland and Permanent TSB have just under €2.5 billion worth of AT1 debt outstanding at present. Those bonds are a key part of a bank’s capital, as they are specifically used to absorb losses if a firm goes bust. Still, up to now investors who hold AT1 debt had expected to be ahead of ordinary shareholders in the queue to be repaid if a bank went under. The Swiss regulator’s decision has turned that on its head for the moment.
The market for these bonds has all but come to a standstill following the announcement and is likely shut for new issuances, Goodbody analyst John Cronin said in a research note. Even when the market does effectively reopen to issue new debt, banks are likely to face higher costs associated with them.
[ Banking crisis: What it means for interest ratesOpens in new window ]
This could drive up borrowing costs for banks which may be passed on to customers in the form of more expensive loans. However, Mr Cronin said the impact on interest rates, which are already increasing as the European Central Bank moves to rein in inflation, is likely to be marginal.
Irish banks face higher costs but appear insulated from wider Credit Suisse fallout, analysts say
We are seeing echoes now of the run-up to the 2008 crash
David McWilliams: We are heading into global financial crises. Will it be 2008 all over again?
Credit Suisse staff see deferred bonuses frozen by Swiss government
AIB pays a coupon, or interest, of between 5.25 and 6.25 per cent on its €1.115 billion of outstanding AT1 bonds, while Bank of Ireland pays between 6 and 7.5 per cent on its €975 million. Permanent TSB has two bonds outstanding. On one issued for €125 million in 2020, it pays a coupon of 7.88 per cent. It pays 13.25 per cent on €250 million worth of debt it sold in September when interest rates were already rising.
In a move aimed at shoring up the market, European regulators assured holders of this type of bond on Monday that, unlike what happened at Credit Suisse, they would be given preference over shareholders in a similar situation at an EU bank.
Bank of Ireland is in “a very strong capital position ending 2022 with fully loaded and regulatory CET1 capital ratios at 15.4 per cent and 15.9 per cent respectively”, a spokesman said. Permanent TSB and AIB both confirmed how much AT1 debt they have outstanding.
[ There are several reasons to worry about the health of Europe’s banksOpens in new window ]
Still, analysts remain confident the Irish banks are relatively well insulated from the wider contagion in the market after the rescue of Credit Suisse and collapse of Silicon Valley Bank.
Bank shares rebounded sharply on Monday as traders digested the details of the arrangement and European financial authorities moved to soothe nerves. Down as much as 5 and 6 per cent at one stage, shares in Bank of Ireland, AIB and Permanent were all up on the session by between 2.5 and 6 per cent in the afternoon.
Mr Cronin said he remained confident the issues that had surfaced at lenders like Credit Suisse would not be replicated in the Irish banking sector, which currently has strong liquidity and capital levels.
In particular, he said that as opposed 2008, Irish banks were currently “flush” with capital. This is partially because the ECB requires Irish banks to carry additional capital in reserve to their loans to provide a cushion in the event of shock losses, a legacy of the crash when Irish banks were among the least healthy in Europe.
Mr Cronin said: “I think therefore, in a perverse way, getting through these kind of harsher macro periods, that would demonstrate strong resilience and for the Irish and UK banks and other banks in Europe will actually kind of drive a reassessment of investors minds that post-crash regulation has worked.”
That was echoed by Davy analysts led by Diarmaid Sheridan, who retained their “outperform” rating across all three lenders. That is the equivalent of a “buy” recommendation.
[ Colm Kelleher: the Corkman leading €3bn takeover of Credit SuisseOpens in new window ]
“We believe Irish banks remain well positioned with undemanding valuations,” they wrote in a note to clients.
Meanwhile, Brian Hayes, chief executive of the Banking and Payments Federation of Ireland, said that Irish banks had “diversified their funding” sources and that they were “very well funded at the moment”.
He said: “I think the business model [of the Irish banks] has been significantly derisked […] So we will have to wait and see as this develops, but I think all of the analysts and the commentators today and over the course of the last week have highlighted the strong resilience across the Irish banking sector.”
But investors and analysts remain on high alert for evidence of further stress within the European banking sector given the pace of developments over the past fortnight.
