FinanceAsia Editorial Board member and Hong Kong-based banking leader, Manoj Agarwal, has taken on an expanded role at France-headquartered bank, BNP Paribas.
The former managing director and co-head of debt capital markets (DCM) origination now serves as managing director and head of DCM for Asia Pacific. Taking effect from March 09, the new post sees Agarwal report to regional head of Global Credit, Liang Si, and regional leader of the Capital Markets Group, Thierry Olive.
Discussing the priorities of his regional senior leadership position, Agarwal said that the Asia-based teams would continue to focus on “increased intra-region coordination” to further enhance the bank’s client delivery capabilities.
“Overall, our Asia-based DCM business benefits from strong origination teams across countries, as well as a global distribution platform.”
He told FA that while 2023 set out a relatively strong start for Asia DCM activity, “Asia G3 volumes have reduced since February, owing to market volatility.”
Elaborating on year-to-date (YTD) deal volumes, which he explained are down by around 10%, he shared, “February volumes were impacted due to increased volatility around interest rate outlook, while March volumes declined with continuing the February trend, combined with recent credit events.”
Credit crunch
Agarwal offered his observations around recent market activity, including the extent of ongoing ramifications surrounding Silicon Valley Bank’s (SVB) collapse.
“Apart from change in market confidence across risk assets, there has been limited direct impact from the event. The Asian banking sector is quite healthy and well-capitalised.”
He said that swift action by regulators has offered some confidence to the markets around financial stability, but “the situation is still evolving and now the market is awaiting to see policy action from Federal Open Market Committee (FOMC) and its impact on broader sentiment.”
The 12 members of the US Federal Reserve’s FOMC meet eight times a year to discuss monetary policy and the state of open market operations. The body’s next scheduled meeting is due to take place over the course of today and tomorrow (March 21-22), with a focus on economic projections.
“Market participants will closely watch the FOMC outcome this week, particularly the statement, in order to gauge the rate outlook, as well as any comments around financial stability.”
Agarwal added that a protracted, hawkish stance from the Fed, could have a negative impact on Asia G3 volumes for the remainder of the year.
Spotlight on SVB On March 10, the Federal Deposit Insurance Corporation (FDIC) announced a move to take over SVB following mass panic by its largely venture capital (VC)- backed client base to withdraw deposits. The fallout came on the back of a low interest rate environment that offered cheap access to capital, and a global, pandemic-fuelled digitisation-drive, both of which supported the development of a burgeoning community of start-ups. Predicated on money being cheap, venture capital (VC) players injected capital into these start- up firms, which facilitated a tech boom. Flush with cash, the up-and-coming companies created deposit accounts in banks like SVB, which was fast establishing itself as the premier destination to cater to their banking needs. SVB put the cash to work by investing in fixed-income US Treasuries, but problems arose when the US Fed started rising interest rates to combat inflation. Given that bond yields trade inversely to price, SVB realised that as rates increased, the value of its assets would decrease. To address this, the bank pivoted to sell its Available for Sale (AFS) portfolio, in a bid to reinvest the proceeds in higher-yielding assets. But with the sale resulting in a $1.8 billion loss, coupled with plans to sell more shares which would likely end up diluting current ownership further, the bank’s clients started withdrawing their deposits. In a rush to ensure that they would not be the last to do so, mass panic ensued alongside mass exodus. It has since transpired that SVB had additional unrealised losses on its balance sheet compared to its peers. Additionally, US dollar stablecoin, USD Coin announced that it held at least a third of its cash reserves at the bank. What exactly this means for those start-ups that have not yet been able to secure their deposits from the bank and are set to navigate a landscape of ongoing market uncertainty, remains to be seen. Implications are also likely across the advancement and development of digital assets. Last week, HSBC acquired the bank’s UK business for £1. Meanwhile, according to media reports, the FDIC plans to hold two separate auctions for the bank’s remaining business; one for its traditional deposit unit; another for its private bank. |
Opportunity amid uncertainty
But Agarwal is cautiously optimistic.
“Despite a decline in year-on-year (YOY) Asia G3 volumes, we saw the execution of large, jumbo-sized transactions with longer tenors in January, which highlight the fact that under the right market conditions, issuers are able to tap significant amounts of liquidity available in the markets.”
“We would expect G3 volumes to pick up again with high quality credits taking the lead… We think that Asia G3 volumes can still be slightly higher as compared to 2022.”
In particular, he noted that South Korean G3 volumes are up by approximately 5% YOY; and in the context of current interest rate paradigms, most local Asian currency markets are witnessing positive volume.
“Sovereign and quasi-sovereign activity has largely driven volumes to start the year, and will likely lead the way in terms of reopening the markets after the current volatility subsides.”
However, additional woes could be set to cloud the horizon.
As Credit Suisse contends with internal crisis, BNP Paribas is one among many European lenders whose additional Tier 1 bonds (AT1) bonds are plunging in value. Media reports have cited that the French bank’s perpetual notes dipped by ten points on Monday (March 20), following an attempt by UBS Group to write off 16 billion Swiss francs ($17.3 billion) worth of Credit Suisse’s AT1 notes, as part of its agreement to acquire its Swiss rival.
As previously reported, the amount of Tier 1 capital held by banks acts as a measure of their financial strength and ability to withstand balance sheet shocks. They were introduced following the Global Financial Crisis (GFC), to protect bank depositors, and are typically used by lenders to raise their core equity base while complying with Basel III.
Although they are considered senior to equity, if an AT1 issuer’s capital ratios fall below a certain threshold, the issuer may halt interest payments or even write the bonds off. Such was the case for private Indian lender, Yes Bank, which decided to write down INR8,414 crore ($1.02 million) worth of AT1 bonds as part of a restructuring plan in March 2020. Earlier this year, the Bombay High Court ruled against the move, a decision that the bank recently challenged in the Supreme Court.
Market commentary suggests that investors are perplexed by the decision to wipe out the value of Credit Suisse’s AT1 instruments over shareholder equity. “It’s crystal clear that AT1s are senior to stocks,” one investor commented in a Bloomberg report.
The situation continues to develop.
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