Financial credit differs from corporate credit because banks operate through layered capital structures, constantly reassessing borrower risk and holding capital against potential losses; Within that structure, AT1s sit just above equity, offering higher yield.
European banks are now fundamentally stronger than in past cycles, supported by tighter regulation, stress testing, improved profitability and better asset quality: This has made moving down the capital stack more attractive, particularly in national champion banks where the risk-reward profile may be compelling.
The asset class has also matured: a growing share of AT1s now carries at least one investment-grade rating, challenging the perception that they are purely high-yield instruments.
For investors seeking real income, European bank AT1s can sit between low-yielding investment grade bonds and more leveraged private credit or high-yield alternatives.
In Algebris’ latest podcast, Bruno Duarte (Financial Credit Portfolio Manager), explains how financial credit works, why AT1s matter, and where the opportunities may lie today.
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