* DBS redeems old-style bank capital and sparks fears of
* Investors face losses on swap to new-style, riskier bonds
* Malaysian banks toy with the idea as well
By Kit Yin Boey
SINGAPORE, Feb 28 (IFR) - DBS Bank will become the first
Asian lender to exercise a regulatory call option on a Basel II
capital instrument on March 21, sparking investor concerns that
other Asian banks may follow its lead.
Similar call options, which allow the issuer to redeem the
bond at par if regulatory changes mean it no longer counts as
capital, are featured in a number of outstanding bank capital
bonds across Asia, including Singapore, Malaysia, Hong Kong and
In many cases, the bonds are years away from redemption and
trade above par. Hence, if these banks decide to exercise
regulatory calls, investors stand to lose out.
In the case of DBS, the bank offered Tier 1 notes which
feature loss-absorption clauses at the same 4.7% coupon of its
outstanding S$1.7bn Basel II perpetuals, which did not include
the option to write down the value of the bond in case the bank
is considered not viable.
That offered a solution for banks looking to replace Basel
II instruments, which are beginning to lose their capital
treatment, with Basel III bonds. Other treasurers are also
considering similar moves.
"If a regulatory call can save me costs, I don't see why I
should not look into that option, especially since our
outstanding Tier 1 bonds are not only expensive, but also will
start to amortise (their capital treatment) soon," said one
executive at a large Malaysian bank.
According to a CreditSights report released at the end of
January, Malaysian banks' Tier 1 and Tier 2 paper, Indian banks'
US dollar notes and issues from a couple of Hong Kong banks are
most at risk of an early redemption.
Malayan Banking is among those likely to benefit from such a
call. The lender has three Tier 1 issues that are callable in
2018, making it a prime candidate for a regulatory call since
there is a significant amount in excess of the eligibility cap
from 2014 to 2018, said analysts David Marshall, Matthew Phan
and Nicholas Yap from CreditSights.
Yet, analysts at CreditSights acknowledged that banks were
likely to be mindful of the backlash from investors, something
that treasury officials said they were keeping in mind.
"At the moment, we are monitoring the developments in Asia
and Europe of how banks are moving to Basel III bank capital,"
said Wong Yee Fun, head of capital management at Maybank.
"We know that a reg call will have implications on our
investors, and it is a very delicate balance to maintain as we
also have to ensure that our investors are satisfied with what
Although most recent US dollar issues from major Indian
banks include a regulatory call option, there is little
likelihood they will exercise them. The bonds are generally
trading below par.
So, while investors will welcome such a move, there is no
incentive for the cash-strapped Indian lenders to make the
calls, since they will have to offer higher coupons to replace
the old notes with new issues.
In Hong Kong, regulatory call risks are present in issues
from Bank of East Asia and Dah Sing, but CreditSights believes
that the risks are limited.
DBS launched its par-for-par exchange exercise for its Tier
1 notes in November, offering new bonds with loss-absorption
clauses that qualify as capital under the new regime, but on the
same terms as the outstanding safer bonds.
The Singapore bank had looked to launch the exercise last
May, but the bonds were trading at cash prices around 107/108,
which meant that a call would have imposed severe losses to
In holding off until November, when the bonds fell to around
102, DBS was able to minimise the pain. Its move, however, left
many investors unhappy.
The exchange offer upset investors as the new bonds paid
only a negligible premium for the increased risk of loss that is
a condition of all Basel III-compliant bank capital.
Investors were also annoyed with what they saw as a threat
in the offer, which had reiterated that the old bonds were
subject to a regulatory call at par. The change-of-qualification
event was triggered with the implementation of the Basel III
regulations in Singapore on January 1 2013.
After completing the exchange, DBS in February said it would
exercise the regulatory call at par on the remaining S$895m of
the issue. At that time, the bonds were trading around 100.5 as
investors were expecting the call.
Even if other banks do not follow suit, DBS may look to
repeat its trick. A similar regulatory call option is included
in the bank's Tier 2 capital, of which about S$1bn is
outstanding in excess of the eligibility cap for the next three
"We think there is some risk that DBS may conduct an
exchange offer at par or exercise the reg call on the sub-debt,
as it has already shown willingness to do this for the hybrids,"
(Reporting By Kit Yin Boey; editing by Christopher Langner and