Contingent convertible debt is considered the riskiest form of funding a bank can get. But in Norway, more banks are issuing it than anywhere else.
In a market that’s a mere fraction the size of London or New York, Norwegian lenders have sold Basel III-compliant additional Tier 1 capital almost as frequently as U.S. and British banks combined, according to data compiled by Bloomberg.
And investors are snapping it up. That’s because AAA-rated Norway’s banking industry has equity that, in some cases, is three times the proposed global requirements, according to Ole Einar Stokstad, head of credit research at Oslo-based DNB Markets.
“Norwegian banks are quite conservative,” Stokstad said in a phone interview. “I’m not worried about the banks at all.”
To be sure, the volume of CoCos issued by Norwegian banks is dwarfed by amounts sold in other markets. The community banks often sell the notes, which can be converted to equity or written down, in issues smaller than $10 million.
Norwegian banks with as few as a dozen employees have issued AT1s 35 times, according to data compiled by Bloomberg. That’s about one-seventh of all global issues and just shy of the 38 done by U.S. and British banks, combined.
Gildeskal Sparebank, located in a village just off the Norwegian Sea, sold just $1.7 million in the securities in October 2013. In contrast, UBS AG may issue as much as $2.1 billion to boost its capital, according to Bloomberg Intelligence.
But the lack of liquidity in Norway’s AT1 market hasn’t hurt pricing. Coupons averaged 5 percent, about two percentage points lower than in the U.K., data show.
That’s because of the banks’ health, according to Stokstad. DNB has shadow ratings on 120 lenders, “most of which are very small, and the median rating is BBB+,” he said.
“Investors are very positive,” said Jan Stebekk, chief executive officer of Vegaarshei Sparebank. Located among the ski slopes of eastern Norway, the lender employs 12 people and raised 15 million kroner ($1.8 million) by selling AT1s in January.
“For small banks like us, it is very common,” Stebekk said. “The government in Norway is setting higher demands than in the rest of Europe, so we need more capital.”
Last year, Norway’s financial supervisor told more than 18 banks to raise their capital after a review of 36 lenders and six finance companies found more than half had too little capital or were building up their capital too slowly.
According to DNB’s Stokstad, local regulators have pushed the average amount of equity that banks hold against unweighted assets to as high as 9 percent. The Basel Committee on Banking Supervision has proposed a 3 percent requirement for global lenders.
“Stringent” requirements have resulted in Nordic banks having among the strongest capital foundations, Standard & Poor’s said in a July 27 note. The rating company said more lenders will follow with CoCos after seeing investor demand for notes sold by Danske Bank A/S and Nordea Bank AB.
Gjensidige Bank ASA says its sale of AT1s earlier this “went pretty well: it priced at what we asked for, 3.15 percent above the three-month” Norwegian interbank offered rate, Tor Egil Nedreboe, head of treasury, said.
Investors “are looking for yield,” Nedreboe said. “We would consider it again. We are trying to optimize our capital, so if we find it beneficial, we will issue more.”