The coupon risk on AT1s
Given the macro-economic outlook, the issue of coupon payments on AT1 is now, in our view, the main risk in this market. It can come from two sources:
- As a matter of principle, banks may be forced not to pay coupons if their capital level falls below a threshold, the “MDA Threshold”, for Maximum Distributable Amounts.
- The authorities could impose this non-payment on banks.
The issue of non-payment of AT1 coupons must therefore be broken down into three questions that we detail in the research note hereafter. We do not see any pressure to push the banks not to pay AT1 coupons. On the contrary, some banks (ING, SEB) have been authorized to reimburse AT1.
Andrea Enria, Chairman of the Prudential Supervisory Board (in charge of the ECB’s banking supervision), has publicly stated “that the ECB has no plans to order banks to suspend coupons on their hybrid debt ”
Many banks (RBS, Unicredit, Société Générale, etc.) stated in their communication that the dividend suspension has no impact on AT1 coupons.
- Dividends and AT1 coupons are of a very different nature: an unpaid dividend is not a definite loss. The money remains in the bank and therefore remains the property of the shareholders. It is possible to pay a double dividend the following year. An unpaid AT1 coupon is lost (with the impossibility of paying a double coupon the following year).
- The suspension of dividends represents a substantial saving (about 50 basis points of CET1, variable depending on the bank). The suspension of AT1 coupons represents an insignificant saving (about 5 basis points of CET1) while the potential negative impact on the market (and the banks’ ability to issue in the future) could be significant.
More details in our note available by clicking on the right hand side button.