Indian banks eye dollars to cover capital shortfall
Indian banks are set to turn to the international markets to supplement their regulatory capital, potentially paving the way for Asia's first US dollar issues of Tier 1 securities under the new Basel regime.india Updated: Sep 20, 2013 09:12 IST
Indian banks are set to turn to the international markets to supplement their regulatory capital, potentially paving the way for Asia's first US dollar issues of Tier 1 securities under the new Basel regime.
IDBI Bank and Bank of India, among other lenders, are already studying the feasibility of issuing additional Tier 1 capital overseas, according to sources familiar with the situation.
Although in their infancy, the deals could set a template for a string of capital raisings from India's overstretched banking sector - especially from state-owned lenders.
Overseas capital raisings would ease some pressure on the government, which has already pledged to pump Rs 140 billion ($2.21 billion) of fresh equity into its state-owned banks.
Such a move would also boost India's foreign exchange position and highlight its ability to attract international investment, helping support the embattled rupee after a near-20% plunge against the US dollar over the summer.
The Reserve Bank of India estimates banks need to raise Rs 5 trillion of new capital in the next six years to March 2018. Of this, common equity is likely to be around Rs1.75 trillion, while the remaining Rs 3.25trillion will come from capital-eligible debt, including around Rs 1.9 trillion of additional Tier 1 bonds.
Bankers reckon the first offshore Tier 1 issues will definitely arrive before the end of the Indian financial year on March 31 2014, most likely from state-owned lenders that account for over 70% of the banking sector.
Concrete plans for Tier 1 issues are unlikely to emerge before the government finalises the capital infusion into the state-owned lenders - expected next month.
This capital infusion is supposed to bring the Tier 1 capital of state-owned banks above the RBI's required 8% capital adequacy ratio. The Tier 1 capital adequacy ratio of IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and Dena Bank stands at below the required 8% level, according to analysts.
Write down, write up
The interest in overseas capital-raising indicates a lack of appetite for loss-absorbing capital in India's local market.
Domestic investors have hesitated to embrace Basel-III compliant capital issues so far. Only one has priced in the rupee market, a Tier 2 bond from United Bank of India in June, and it ended up as a bilateral deal with Life Insurance Corp of India.
A second Rs15 billion Tier 2 bond from Bank of India is likely to end up the same way.
A US dollar issue, however, promises to usher in a new structure for the Asian bank capital market, since the RBI is the only regulator in the region to have explicitly allowed the reinstatement of capital if the financial condition of a lender improves.
Under Basel III rules, all additional Tier 1 instruments must absorb losses, either through conversion to equity or temporary write-offs, at the point that a bank becomes non-viable. This is defined in India as a Tier 1 capital ratio of 6.125% or below.
RBI also provides for a write-back of the Tier 1 capital when the financial condition of the bank improves, allowing holders of such instruments to share in the upside potential in the same way as common equity holders.
These write-ups are subject to conditions, such as the bank having to wait for a year after paying its first dividend after breaching the pre-specified trigger.
The aggregate write-back is restricted to a certain percentage of the dividend declared during a year, and limited to up to 25% of the amount of the dividend paid a particular year.
That may allow Indian banks to mimic a structure Societe Generale introduced at the end of August. SocGen (A2/A/A) raised $1.25 billion through the issuance of a perpetual hybrid subordinated bond, paying a coupon of 8.25%.
With an order book of $4 billion, SocGen's deal offered a "temporary write-down" feature in which the bonds would temporarily be wiped out if the bank's core capital ratio fell below 5.125%.
"The write-ups will be preferred by investors as these are more positive than the binary view of a conversion of the capital into equity or a write-down on hitting the trigger," said a Singapore-based DCM banker. "However, I am not sure if the pricing of these Tier 1 bonds will have much bearing because of the write-ups as these features are essentially tail risks for investors."
No Asian issuer has yet sold Tier 1 securities in the public US dollar market under the Basel III rules, but the first Tier 2 dollar issue is expected as soon as next week.
Philippine lender Metropolitan Bank and Hong Kong-based ICBC Asia are discussing separately new-style Tier 2 bonds with international investors.