AT1 Markets: Valuation, Regulation and the Search for Relative Value

European banks have entered a markedly different environment from the one in which AT1 instruments were first introduced. Stronger capital positions, improved profitability and more demanding regulatory standards have transformed the sector, while AT1s have evolved into a core component of bank capital structures.

Against that backdrop, Natixis CIB’s Christopher Agathangelou – Global Head of IG Syndicate,   hosted a webinar with Thibaut Cuillière – Head of Sector & Credit Research and Baptiste Reuillon – Senior Bank Analyst, Jérôme Legras, Head of Research at Axiom Alternative Investments, and Julien de Saussure, Fund Manager at Edmond de Rothschild AM, to take a closer look at how investors are valuing the asset class, the prospects for regulatory reform and where opportunities remain in an increasingly efficient market.

Despite the complexity of the asset class, AT1 spreads have become increasingly quantifiable. Using a universe of more than 160 liquid AT1 securities, Natixis CIB Research applied a seven-factor framework incorporating ratings, price to book value, MDA, reset spreads, bank’s business model & call practices and other issuer-specific characteristics to explain approximately 87% of spread dispersion across the market.

There are several notable trends. Rating differentiation has become much more pronounced than it was six or seven years ago, while dollar-denominated AT1s continue to trade modestly wider than comparable euro securities. Reset spreads remain one of the most important drivers of valuation, with investors continuing to place significant value on refinancing economics and extension risk.

Quantitative analysis only tells part of the story. Investor perception remains an important driver of performance, particularly when it comes to an issuer’s reputation, historical conduct and approach to call decisions. Natixis CIB’s qualitative scoring framework suggests these factors can have a meaningful impact on spreads and often help explain pricing differences between otherwise similar issuers.

While formal valuation models have their place, AT1 investing remains heavily rooted in relative value analysis. Investors begin with a view on the underlying strength of the bank and then assess the specific characteristics of the instrument, including reset spreads, call incentives, liquidity and positioning within the capital structure.

No single model captures the full complexity of the market. Increasingly, investors are combining traditional credit analysis with more advanced techniques, including artificial intelligence and behavioral modelling. These approaches focus less on individual balance-sheet metrics and more on understanding how issuers behave across different market environments. In many cases, the most effective models resemble the decision-making process of experienced traders rather than traditional analysts.

Discussions around AT1 reform continue to resurface, covering everything from trigger levels to coupon structures and refinancing incentives. However, the likelihood of meaningful structural change remains low. Any major reform would require broad international agreement and could have significant consequences for bank funding markets.

The debate also takes place against a backdrop of significantly stronger bank balance sheets. European banks now operate with capital levels comfortably above regulatory minimums, making the prospect of contractual AT1 triggers being activated increasingly remote. In that context, many investors see the current framework as evidence of the success of post-crisis reforms rather than a structure in need of wholesale redesign.

The discussion also highlighted the growing importance of liquidity risk. Recent banking stress events from Credit Suisse and Silicon Valley Bank (SVB) demonstrated that modern crises can develop through rapid deposit outflows rather than gradual capital deterioration, reinforcing the idea that resilience depends on liquidity more than capital ratios alone.

AT1 spreads are undeniably tight by historical standards, but stronger fundamentals help explain current valuations. Bank profitability has improved, rating momentum remains positive, and the overall quality of the asset class has strengthened considerably since the pandemic.

At the same time, AT1s have increasingly become yield instruments rather than pure spread products. This has broadened the investor base and helped support valuations even as government bond yields have risen.

Yields across the AT1 market remain attractive between 5% and 6% (to call), exceeding dividend yields available from European bank equities. Relative to other parts of the capital structure, investors continue to receive meaningful compensation for taking subordinated risk.

Broad market dislocations have become increasingly rare, making security selection more important than market direction. Opportunities are more likely to emerge from issuer-specific events, including mergers and acquisitions, than from a broad repricing of the asset class.

Certain higher-reset securities that underperformed during periods of market volatility continue to offer relative-value opportunities, particularly where market pricing does not fully reflect underlying fundamentals.

With spreads already reflecting much of the sector’s improvement, the focus has shifted towards maximizing carry and managing portfolio risk rather than relying on further spread compression. In today’s market, generating attractive risk-adjusted returns is increasingly about optimization rather than outright conviction.

The AT1 market has matured alongside the European banking sector itself. Stronger bank balance sheets, a broader investor base and increasingly sophisticated valuation techniques have helped establish AT1s as a core component of bank funding.

While debates around regulation will continue, the consensus view is that the asset class remains a functioning and important part of the capital framework. For investors, the challenge is no longer understanding whether AT1s work, but identifying value in a market where fundamentals are strong, spreads are tight and opportunities are increasingly driven by relative value.