The market has renewed its appetite for hybrid issuances, and Latin American (LatAm) banks are taking advantage. We expect LatAm banks will continue to benefit from improved regulatory capital metrics. In addition, Chilean and Mexican banks will also benefit from interest repayment not affecting profitability metrics, as it isn't reflected in the profit and loss statements (P&L). Hybrid instruments offer higher yields amid falling interest rates, but their features make them less favorable for investors than senior debt.
What's Happening
We expect LatAm banks to issue more hybrid instruments in 2024. Although LatAm banks haven't been issuing very much in global capital markets during the past two years, they started tapping the capital markets with Tier 2 and additional Tier 1 (AT1) instruments in early 2024.
The market has a renewed appetite for hybrid instruments despite the write-down to zero of Credit Suisse's CHF16 billion AT1 portfolio. This has increased banks' cost of capital and made new AT1 issuance more difficult and expensive. Morever, amid high global interest rates, many banks decided not to exercise the call option on these instruments, which investors didn't expect. As a result, appetite for these instruments has been relatively low since the Credit Suisse incident.
Why It Matters
As interest rates decrease, hybrid instruments offer good investment opportunities given their higher yields. Hybrid instruments have certain features that make them more capital-like and less favorable than senior debt to investors. They are subordinated, and AT1 instruments generally bear the risk of coupon nonpayment or principal write-down if the bank has distress. These instruments can offer higher returns than traditional debt, with lower risk than pure equity.
We think increased investor appetite for LatAm bank instruments reflects the banks' good profitability given their relatively high margins and diversified businesses. International peer banks had higher profitability amid high interest rates, but as interest rates decrease, profitability will decline. However, LatAm banks have had good profitability even when rates are low thanks to their higher margins. Moreover, they offer higher rates because of their relatively lower ratings compared with international peers.
What Comes Next
We expect LatAm banks' appetite to issue up to $3 billion in 2024. Hybrid instruments allow banks to improve capital metrics without diluting the ownership of their existing shareholders. We expect Chilean and Peruvian banks to continue issuing hybrid instruments, because they are still implementing Basel III requirements, while Mexican banks are building total loss-absorbing capacity.
Chilean and Mexican banks will also benefit from interest repayment not affecting profitability metrics. The accounting is different in other countries, like Brazil, where we don't expect banks to issue such instruments due to this accounting feature. We also believe subsidiaries of international banks will benefit from the support of parent companies that acquire these instruments. This has been the case of Santander Chile, and we think Mexican subsidiaries of international banks will benefit next.
Background In Brief
- Mexico-based BBVA Bancomer's $900 million of subordinated notes due 2039 in January 2024 at a 8.125% rate;
- Banco Internacional del Peru S.A.A. - Interbank's $300 million of subordinated notes due 2034 in January 2024 at a 7.625% rate; and
- Banco de Credito e Inversiones' (BCI's) $500 million of perpetual AT1 instruments (for which BCI attracted more than $3.725 billion in orders) in February 2024 at a 8.75% rate.
This report does not constitute a rating action.
| Primary Credit Analyst: | Cynthia Cohen Freue, Buenos Aires + 54 11 4891 2161; cynthia.cohenfreue@spglobal.com |
| Secondary Contact: | Sergio A Garibian, Sao Paulo + 55 11 3039 9749; sergio.garibian@spglobal.com |
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