By Jørgen Kjærsgaard and Steve Hussey
As the effects of the coronavirus wreck economies, banks are facing increased loan-loss risks and prioritizing capital conservation. Their additional Tier 1 (AT1) securities should survive a short bout of the virus. But even in a prolonged pandemic, the risk/reward trade-off might be better than perceived.
Revenue shortfalls are spreading across industries, forcing lenders to increase their loan-loss reserves. Mounting realized losses threaten subordinated credits, and European banks’ AT1s are seen as most at risk. Even so, we believe AT1s issued by stronger European banks can earn attractive returns.