OREANDA-NEWS. Issuance of Additional Tier One (AT1) securities by Asia-Pacific banks should continue to gain momentum to support regulatory capital growth, says Fitch Ratings. China is likely to remain the largest issuer in the region, but banks in other countries will also look to replace legacy capital instruments and strengthen and optimise capital structures. Issuance has largely been a domestic market feature (aside from China), but we expect cross-border issuance to increase over time.

Fitch's latest Banks AT1 Tracker, published on 17 November, highlights key trends and data on global AT1 issuance in 3Q15. APAC banks made up 49% of issuance for the quarter. They continue to increase their share of the market, with USD63.7bn of outstanding AT1s accounting for 32% of the global total at end-3Q15 compared with 25% at end-2014.

Japanese banks topped the APAC region in terms of new issuance in the quarter, with 49% of total volume. They started tapping the market for the first time this year, and all three 'mega banks' had issued into the domestic market by end-3Q. Further AT1 issuance is likely to refinance maturing legacy instruments. We also expect the mega banks to issue via the international market at some point, to support their overseas balance-sheet growth.

Chinese banks were also strong issuers, although volumes were significantly lower than in 4Q14 and 1Q15. The five large state-owned banks are likely to remain the region's largest issuers in the international and domestic market. An important near-term driver for AT1 issuance will continue to be capital pressures from ongoing balance-sheet growth, and slowing profitability. The extension of the total loss-absorbing capacity (TLAC) requirements for China's four global systemically important banks to 2025 means the issuance pipeline for qualifying instruments will rise as these banks are largely deposit funded. However, we would not expect this to be a key driver for AT1s.

Outside the large Chinese banks and in Hong Kong, the trend in Asia has been for banks to tap their home markets in local currency, where there are clear pricing advantages. This has been the case for smaller Chinese banks and for issuance out of Japan, Australia, India and Singapore. But the relatively shallow local markets mean this is unlikely to continue indefinitely, especially as AT1 needs grow for the region.

In India, where the banking sector is weakly capitalised, the regulatory capital requirement in transitioning towards Basel III is substantial, and AT1 instruments will be an important instrument in filling the gap. Tapping foreign markets is inevitable in order to meet the AT1 requirements, as the domestic investor pool is small.

In Australia and Singapore, the banks have largely issued AT1s to replace legacy capital instruments, and this will continue to drive issuance trends. Issuance may gain pace as banks seek to lift capitalisation relative to their global peers and optimise their capital structures. For Australian banks, this may mean tapping the local wholesale market as well as looking offshore, as they have been focused predominantly on domestic retail investors.