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GCC banks’ AT1 investors face contrasting prospects: Fitch

1 Dec 2020

Recent decisions by two Omani banks not to call their Additional Tier 1 (AT1) capital securities since the onset of the coronavirus pandemic, in contrast to two banks in the UAE that exercised their call options, highlight different risk levels for AT1 investors between GCC countries, Fitch Ratings said.

According to Fitch Ratings, extension risk for AT1 investors in Oman crystallised for the second time this year with National Bank of Oman’s (NBO) decision not to call US$300mn of AT1 securities in November. This follows BankDhofar’s decision not to call US$300mn AT1 securities in May.

‘We believe the banks’ decisions were influenced by tougher refinancing conditions, with lower investor appetite, wider credit spreads, and the prospect of pressure on capital due to the economic effects of the pandemic and low oil prices,’ the ratings agency said in a statement released on Monday.

In contrast, Fitch Ratings said, two UAE banks have decided to exercise call options on their AT1 securities since the onset of the pandemic. First Abu Dhabi Bank called US$750mn in June before issuing US$750mn of new AT1 securities in October, and Emirates NBD called US$500mn in September, having pre-financed this by issuing US$750mn in July.

‘We believe the contrasting approaches are due to different degrees of access to capital markets. Access is typically more difficult for Omani banks given their lower credit ratings, particularly after multiple downgrades in recent years linked to downgrades of the Omani sovereign. UAE banks, and those in Kuwait and Qatar, generally have strong market access, which underpins the high funding and liquidity scores that feed into their credit profiles,’ Fitch Ratings said.

The ratings agency added that GCC banks have US$3.4bn of AT1 instruments with a first call date in 2021.

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