We've long favoured the Swiss low-trigger AT1s and Tier 2s as core holdings. We believe CoCos remain the best value in the Swiss debt structure but here we add a number of high-trigger AT1s and opco and holdco seniors. Expected low volatility, manageable supply and relative value all play roles.
Swiss low-trigger (LT) AT1s and Tier 2s have been staple buys for us since
capital rules were changed in Switzerland earlier this year. With grandfathering
making first calls clear, in our view, we don't need to worry about perpetuity risk
and we also believe regulatory calls (at par or just above) are not possible.
Having reiterated our views here many times, we expand our analysis to look at
the other UBS and CS bonds across the debt stacks.
Our strategists favour financials over non-financials in European credit for 2017,
and considering the political calendar (and despite our economists expecting GDP
growth to be steady and above potential), we believe the Swiss provide safehaven
status. Switzerland is not a member of the EU so it cannot 'Swexit', it has a
stable government and a robust economy and, importantly, it recently revised its
bank capital rules so we have a set of stable regulatory requirements which are
not expected to change any time soon.
New rules on going and gone concern debt should lead to a further CHF5.4bn
(€5bn) of high-trigger (HT) AT1s and CHF32bn (€30bn) of holdco senior. Using
3Q figures, and looking out to January 1, 2020, this equates to less than €1bn of
AT1s per year per bank and, in terms of holdco senior issuance, both banks have
significantly negative net issuance, as opco senior is being refinanced as holdco.
Looking at peers such as BNP, Barclays and ING Group, these issuance numbers
are not large and are entirely manageable, in our view.
How does Swiss resolution work in practice? In terms of debt, all CoCos (holdco,
opco, Tier 2, AT1, low-trigger, high-trigger) would convert or get written down
before the holdco is put into resolution. Any sub debt at the holdco would be
bailed in or converted to equity next, and then senior holdco. We view it as
extremely unlikely that the regulator would then look at the opco for further
bail-in, as this brings with it difficult legal issues. Like UK opco senior debt, we
view Swiss opco senior debt as virtually 'untouchable'.
Trading wide to French and UK peers, we are happy adding more Swiss debt to
our recommendations to buy across the board. We comp CS to Barclays for
senior holdco (litigation risks) and UBS to HSBC Holdings and Lloyds (as strong
credits, the former globally diversified, US earnings). With few comps in £, we
believe CS holdco debt provides good diversification there and elsewhere, both
banks generally trade cheap to peers and clearly do not share the political risks.
Swiss LT CoCo debt has already been shown to be a very low-volatility asset
class this year.