Asian banks warm to bond market innovation

SINGAPORE: A shortage of US dollars, new banking regulations and strong investor demand mean Asian banks are set to help spur longawaited innovation in the region’s debt capital markets.

Singapore is consulting on new guidelines to help its banks issue covered bonds, and Hong Kong plans to study investor appetite for similar products, while banks across Asia are looking at forms of debt previously unseen in the region, such as hybrid or perpetual bonds.

“Every institutional investor is waiting for another investment to diversify their portfolio, especially those who already own unsecured bonds,” said Warren Lee, head of structured financing solutions at Standard Chartered in Hong Kong.

Although most Asian banks are flush with local currency retail deposits, many have been struggling to get access to enough US dollars, so they are looking at new ways of issuing bonds to raise these funds.

In Singapore, for example, Fitch Ratings estimate that while local banks’ overall loan-to-deposit ratio is around 90%, the figure for their US dollar trading books exceed 100%.

The incoming Basel liquidity rules are also encouraging regulators in the region to help develop markets for highly-rated liquid assets that banks can hold to comply with more stringent capital requirements, such as covered bonds.

All these moves are likely to be lapped up by investors, with demand for Asian bank bonds strong given their reputation as being some of the safest lenders in the world in which to invest.

Demand for unsecured Asian corporate bonds has been buoyant so far this year, with issuance in first quarter alone more than half that seen for the whole of 2011.

The Monetary Authority of Singapore issued a consultation on covered bonds last month, saying that the assets could provide an additional longer-term funding source for banks.

Covered bonds are secured against a basket of assets, typically home mortgage loans. They are a popular safe-haven holding for investors, because if the issuer goes into bankruptcy investors can lay claim to the underlying assets.

For banks, covered bonds also tend to be a cheaper source of funding as investors are willing to accept a lower yield.

Thomson Reuters IFR reported earlier this month that Singapore’s DBS Group Holdings was already looking at a possible covered bond issue.

“While funding is not a huge problem for them (Singapore banks) right now, they want to diversify in case the senior unsecured market dries up in the future,” said Helen Wong, director of structured finance at Fitch Ratings in Hong Kong.