 "As yields fall, PSU banks gear up to raise capital")
As yields on government bonds are at a low, capital-starved public-sector banks are looking at it as an opportunity to raise capital by issuing additional Tier-I (AT-I) bonds - an instrument recently approved by the Reserve Bank of India (RBI).
Under Basel-III capital norms, additional tier-I capital will be included in the common equity Tier-I (CET 1) capital. Banks should have 4.5 per cent CET 1 within the overall capital requirement of eight per cent, applicable from January 2015.
In August, Bank of India had raised Rs 2,500 crore through these bonds and later IDBI Bank also raised capital by AT-I.
Now, with yields on government banks softening as interest rate cuts by the central bank is expected on the back of falling retail inflation, bankers said it would be less expensive to raise capital via these instruments. Yields on the 10-year benchmark bond - one of the indicators that is taken into consideration while pricing these bonds - closed at 8.18 per cent on Monday, the lowest since August 8, 2013.
Most public-sector banks' capital position has weakened over the past year as higher provisioning was required for the rise in non-performing assets. In addition, the government is yet to infuse capital in the banks despite Rs 11,200 crore was allocated during the interim Budget of 2014-15.
"We are planning to raise Rs 500 crore via AT-I bonds with another Rs 500 crore as a greenshoe option. I think further interest rates will come down and if rate cut happens, we can raise it for 10 per cent," said C V R Rajendran, chairman and managing director of Andhra Bank, which has a capital adequacy ratio of 10.2 per cent.
Pune-based lender Bank of Maharashtra is the other bank that is considering the same route. "We are looking to raise Rs 500 crore capital by AT-I. This will enable us to raise capital without increasing our equity base," said S Muhnot, chairman and managing director of the bank. Bank of Baroda (BoB), which is planning to finalise its fund-raising plans via AT-I in the next few days, received IND AA+ (exp) rating by India Ratings. "The rating on AT-I instrument reflects BoB's strong stand-alone credit profile, which is better than that of almost all government-owned banks. BoB clocked the highest RoA (return on asset, at 0.69 per cent) among public sector banks in FY14."
BoB's CET-I ratio at end-June 2014 was also healthy at 8.76 per cent, compared to a median of 7.7 per cent for the other public-sector banks. Syndicate Bank and Central Bank of India have also taken their bond approvals for raising Tier-I capital.
"We have recently received government's approval for raising equity by a qualified institutional placement. In addition, we have board approvals for raising Rs 1,000 crore by AT-I bonds," said Anjaneya Prasad, executive director, Syndicate Bank.
Similarly, Central Bank of India's board has approved fund raising of Rs 2,000 crore, which could be done by a combination of capital infusion by the government, and divesting its stake in IL&FS. The bank's board has approved Rs 1,300 crore capital-raising by the AT-I instruments, said a senior official of the bank.
Under Basel-III capital norms, additional tier-I capital will be included in the common equity Tier-I (CET 1) capital. Banks should have 4.5 per cent CET 1 within the overall capital requirement of eight per cent, applicable from January 2015.
In August, Bank of India had raised Rs 2,500 crore through these bonds and later IDBI Bank also raised capital by AT-I.
Now, with yields on government banks softening as interest rate cuts by the central bank is expected on the back of falling retail inflation, bankers said it would be less expensive to raise capital via these instruments. Yields on the 10-year benchmark bond - one of the indicators that is taken into consideration while pricing these bonds - closed at 8.18 per cent on Monday, the lowest since August 8, 2013.
Most public-sector banks' capital position has weakened over the past year as higher provisioning was required for the rise in non-performing assets. In addition, the government is yet to infuse capital in the banks despite Rs 11,200 crore was allocated during the interim Budget of 2014-15.
"We are planning to raise Rs 500 crore via AT-I bonds with another Rs 500 crore as a greenshoe option. I think further interest rates will come down and if rate cut happens, we can raise it for 10 per cent," said C V R Rajendran, chairman and managing director of Andhra Bank, which has a capital adequacy ratio of 10.2 per cent.
Pune-based lender Bank of Maharashtra is the other bank that is considering the same route. "We are looking to raise Rs 500 crore capital by AT-I. This will enable us to raise capital without increasing our equity base," said S Muhnot, chairman and managing director of the bank. Bank of Baroda (BoB), which is planning to finalise its fund-raising plans via AT-I in the next few days, received IND AA+ (exp) rating by India Ratings. "The rating on AT-I instrument reflects BoB's strong stand-alone credit profile, which is better than that of almost all government-owned banks. BoB clocked the highest RoA (return on asset, at 0.69 per cent) among public sector banks in FY14."
BoB's CET-I ratio at end-June 2014 was also healthy at 8.76 per cent, compared to a median of 7.7 per cent for the other public-sector banks. Syndicate Bank and Central Bank of India have also taken their bond approvals for raising Tier-I capital.
"We have recently received government's approval for raising equity by a qualified institutional placement. In addition, we have board approvals for raising Rs 1,000 crore by AT-I bonds," said Anjaneya Prasad, executive director, Syndicate Bank.
Similarly, Central Bank of India's board has approved fund raising of Rs 2,000 crore, which could be done by a combination of capital infusion by the government, and divesting its stake in IL&FS. The bank's board has approved Rs 1,300 crore capital-raising by the AT-I instruments, said a senior official of the bank.