Fixed Income Analysis /
Global

CEEMEA Perps: Call me!

  • Two CEEMEA banks have decided not to redeem perpetual securities at the first call dates this year.

  • This has raised questions about other banks' securities and about how best to value perps.

  • Gazprombank and Santander show that issuers can subsequently renege on decisions to skip calls.

CEEMEA Perps: Call me!
Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
28 April 2020
Published byTellimer Research

In 2019, Dubai Islamic Bank, Emirates NBD, Al Hilal Bank and Burgan Bank redeemed perpetual securities totalling US$3bn at the first call dates. 2020 has been quite different so far. Ahli United Bank and Bank Dhofar have both announced that their perpetual securities will not be called at the first call dates. This has cast doubt over other banks exercising call options on similar securities, and led to questions about how best to value perpetual securities. Assessing yields to perpetuity may be viewed as most prudent. However, Gazprombank’s decision to call a bond two years after the first call date shows that issuers can renege on previous decisions to skip calls.

On March 3, Ahli United Bank (AUBBI) disclosed that the US$400mn AUBBI 6.875% Perp would not be redeemed on the first call date, which is 29 April. The bond is callable on subsequent coupon payment dates, and the lender stated that its capital structure 'will be reassessed depending upon the results of the KFH (Kuwait Finance House) transaction.' Completion of that transaction has been temporarily suspended until December 2020. There have been reports that Kuwait’s finance minister had asked to reassess the transaction, but both AUBBI and KFH have said no correspondence has been received. These reports add to uncertainty regarding the AUBBI 6.875% Perp.

The latest figures we have for AUBBI are for FY 2019. Attributable net income rose to US$730mn from US$698mn in the previous year, generating a return on equity of almost 18%. The NPL ratio was flat yoy, at 1.9%. The LCR was 315%. All capital ratios were lower than at YE 2018 but remained above the minimums required by the Central Bank of Bahrain. The CET1, Tier 1 and total capital ratios were 13.1%, 14.9% and 16.4% respectively which compare to the regulatory minimums of 9%, 10.5% and 12.5% (all include the capital conservation buffer).

Bank Dhofar (BKDBOM) has decided not to redeem the US$300mn BKDBOM 6.85% Perp at the first call date, which is 27 May. The lender cited 'the current extraordinary market circumstances due to the Covid-19 pandemic' as one reason for the decision. The Perp is callable at every subsequent coupon payment date, and the bank says its position will be re-evaluated taking market conditions and capital into account. The bank had previously approved issuance of Additional Tier 1 instruments of US$300mn (or OMR equivalent). The new issue approval suggests the BKDBOM 6.85% Perp may well have been called if the issuer was able to replace it.

Bank Dhofar recently disclosed net income of OMR8.8mn for Q1 2020, down 30% yoy, reflecting lower revenues as well as higher costs and provisions. The equity/assets ratio was slightly higher than it was a year ago (12.02% versus 11.89%). At YE 2019, the CET1, Tier 1 and total capital ratios were 12.6% (minimum: 9.5%), 16.4% (11.5%) and 15.5% (13.5%) respectively.

The table that follows shows perpetual securities issued by financial institutions in the CEEMEA region, ordered by the first call dates. The ATF Bank and Bank CenterCredit perpetual securities are excluded. Following the announcements from AUBBI and BKDBOM, there are three other call dates to watch this year – in June, September and November. Current valuations suggest that the market does not assign a very high probability to these call options being exercised. For First Abu Dhabi Bank (FABUH) and Emirates NBD (EBIUH) the likelihood of the call options being exercised is higher, we think, than it would have been for AUBBI or BKDBOM. Having said this, we acknowledge that even these much larger UAE banks face challenges – Q1 2020 net profit was down in excess of 20% yoy at FABUH and EBIUH. Both banks’ capital ratios remain above regulatory minimums and positively, some forbearance measures have been introduced in the UAE.

Table 1: Perpetual securities
Bond nameAmount (US$ mns)First call date

AUBBI 6.875% Perp

400

29/04/2020

BKDBOM 6.85% Perp

300

27/05/2020

FABUH 5.25% Perp

750

17/06/2020

EBIUH 6.375% Perp

500

17/09/2020

NBOBOM 7.875% Perp

300

18/11/2020

DIBUH 6.75% Perp

1,000

20/01/2021

NTBKKK 5.75% Perp

700

09/04/2021

BUBYAN 6.75% Perp

250

16/05/2021

NOORBK 6.25% Perp

500

01/06/2021

AUBKWK 5.5% Perp

200

25/10/2021

CBIUH 6.5% Perp

125

23/12/2021

ALFARU 8% Perp

700

03/02/2022

WARBAB 6.5% Perp

250

14/03/2022

BARKAB 7.875% Perp

400

31/05/2022

QATIQD 4.95% Perp

450

13/09/2022

AKBHC 9.25% Perp

300

15/09/2022

CRBKMO 8.875% Perp

670

10/11/2022

VTB 9.5% Perp

2,250

06/12/2022

CGRPNV 8.95% Perp

50

18/12/2022

ALBRK 10% Perp

205

20/02/2023

ALFARU 6.95% Perp

500

30/04/2023

ADIBUH 7.125% Perp

750

20/09/2023

ALAHKW 7.25% Perp

300

26/09/2023

YKBNK 13.875% Perp

650

15/01/2024

DIBUH 6.25% Perp

750

22/01/2025

Source: Bloomberg, Tellimer Research


The chart that follows shows the difference between yields to the first call date and to perpetuity (YTC and YTP). For Ahli United Bank (AUBBI) YTC is now calculated to the October 2020 call date. Unsurprisingly, the difference in yields is greatest for securities with near-term call dates.

Figure 1: YTC minus YTP (ppts)

Source: Bloomberg, Tellimer Research. Based on indicative mid yields.

The ATF Bank and Bank CenterCredit perpetual securities have remained outstanding many years after the first call dates. These examples suggest we ought to value bonds which are not called to perpetuity. However, in March this year Gazprombank announced that it would redeem a US$1bn perp, which was first callable in April 2018. We think this is especially noteworthy as US and EU sanctions have restricted access to the Eurobond market for Gazprombank for a number of years. Outside of our coverage region, we note Santander’s decision to redeem a EUR-denominated perpetual security after skipping the first call. Decisions at Gazprombank and Santander suggest securities may not always be true perpetuals even when first calls are skipped. Favourable market conditions and the ability to replace these securities may prove key.

Chart 2: YTD price changes

Source: Bloomberg, Tellimer research. Based on indicative mid levels.