The Hindu Business Line : Banks lining up Tier II bond issues

A SLEW of bank bond issues for raising Tier II capital is expected to swamp financial markets in the coming weeks to exploit the absence of government borrowings for the rest of the financial year.

Bankers said that among the issues expected to hit the market include those from Canara Bank and Vijaya bank. Some of the banks, sources said, had preferred to wait for the government's last borrowing for the current financial year. This was to give them a cue about the pricing. The last issue of dated securities for the year, 8.35 per cent 2023 bond issue, was priced at 7.34 per cent, at least 15 basis points below the market projections.

With the low cut-off yields on the Government securities issue, bankers said they expected to raise tier II capital on favourable terms.

The bankers said that one of the major reasons for banks' anticipation of a favourable pricing stemmed from the fact that the remaining weeks are likely to see markets with a surfeit of liquidity. Most government borrowings during the next few weeks are expected to be in the form of only treasury bills, inclusive of the market stabilisation scheme.

As a result, bankers expect pricing to move down lower. The last few rounds of tier II bond issues were priced at around 7.25 per cent, i.e. at least 75 basis points above the five-year sovereign yield. The five-year YTM (yield to maturity) has hovered around 6.6 per cent since the beginning of this calendar year. But after Monday's auction, the 5-year YTM has moved down to 6.35 per cent and is seen moving even lower in the coming weeks. Accordingly bankers said the pricing of bank bond issues was likely to be below the 7 per cent.

Bankers this year have been raising tier II capital in view of the sharp rise in credit growth. Credit offtake has maintained an over 20 per cent growth rate since the beginning of this year, led by non-food credit growth.

Bankers also said that part of the reason for the increased capital growth was the high depreciation on their investment portfolios and the dividend demand from the government for meeting fiscal shortfalls. The sources said these demands on their operating surpluses were likely to lead to a slight weakening of their capital.

Despite this slight weakening, bankers said, the industry's tier I capital was still comfortable at about 9 per cent. Tier I capital includea owned funds. The industry has an average capital to risk weighted assets ratio of about 11 per cent. This was inclusive of both tier I and tier II capital. According to current regulations, tier II capital was expected to be 45 per cent of tier I. Bankers said that the capital adequacy ratios were expected to drop to less than 10 per cent if the current pace of credit growth continued.

This fiscal year few were expected to make tier one issues in the form of public offerings. Even fewer are expected to return capital to the government. Instead, most of them have decided to move ahead with tier II issues for time being and before beefing up their tier I capital.

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