Moody’s: Global CoCos issuance falls in 2015; Asian, European banks still dominant

Moody's

New York, February 03, 2016 — Global issuance volume of contingent capital securities (CoCos) for 2015 fell sharply by 42% from 2014, but remained dominated by Asian — particularly Chinese — and European banks, said Moody’s Investors Service.

Moody’s said the primary reason for the fall to $101 billion from $175 billion was lower issuance by Chinese banks — driven by persistently weak market conditions and a slower pace of balance-sheet growth that may have reduced their short-term capital requirements.

In addition, some 76% of global issuance comprised Additional Tier 1 (AT1) CoCos mainly subject to conversion with mechanical triggers, while the remaining 24% was Tier 2.

Over 2015, Asian banks accounted for 48% of issuance and European banks 40%, largely reflecting the progress regulators in these two regions have made in implementing Basel III regulatory capital requirements.

In Asia, banks — particularly China institutions — have issued CoCos to fund rapid balance sheet growth and to meet capital requirements in jurisdictions that have made progress in early adoption of the Basel III capital framework.

By comparison, many European banks — taking advantage of the relatively low costs associated with CoCos (compared to common equity) — had turned to the instruments to shore up their capital ahead of regulatory stress tests in 2014.

CoCo issuance also continues to be concentrated among a group of large banks, with the top 10 issuers — five European and four Chinese banks, and one Australian — accounting for 37% of all issuance since 2009.

Although the base of CoCo issuers has widened in recent months, Moody’s expects this concentration among the top 10 issuers to persist as the largest globally active institutions have to meet significantly higher capital requirements and buffers under Basel III and respective national and regional regulatory frameworks.

Subscribers can access the full report, “Banks — Global: Moody’s Quarterly CoCo Monitor: Issuance to be Flat in 2016 After 42% Drop in 2015”, at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1013174.

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