Banks line up Tier II bond issues

Public sector banks are rushing through private placements of bonds as they look to shore up their Tier II capital base.
Oriental Bank of Commerce and Syndicate Bank announced plans last week to raise funds through issue of Tier II bonds.
And, if sources are to be believed, State Bank of India, Punjab National Bank, Bank of India, Bank of Baroda and Indian Overseas Bank will follow suit soon.
Tier I capital is the core capital of a bank and includes equity capital and disclosed reserves.
Tier II capital, on the other hand, is supplementary capital. It includes revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt. The components of Tier II capital can be split into upper Tier II and lower Tier II – the latter being the cheaper of the two.
The two terms are used to describe the capital adequacy of banks.
On an average, the state-owned lenders are expected to raise `500 crore through private placements of corporate bonds, with coupon rates – the interest rate stated on a bond, expressed as percentage of its face value – in the 8-9% range.
“Credit growth for a few banks is well above the expected range in the second half, while deposit growth is slowing down. This will make them hit the bond market for raising funds,” said Ajay Malgunia, senior vice-president, Edelweiss Securities.
For the fortnight ended November 16, credit disbursal by banks was up 16.9% at `35,000 crore, while their deposits grew 13.4% at `25,789 crore, according to Reserve Bank of India data.
Following a finance ministry directive on offloading high-cost deposits like bulk deposits and decreasing their high reliance on certificates of deposit, the lenders are expected to use the funds raised by them for financing long-term loans and meeting other capital requirements.
“Banks can use these funds for meeting capital requirements and correcting asset liability match to some extend,” said an analyst, requesting anonymity.
Coupon rates on 10-year AAA bonds issued by banks have fallen 35 basis points in the last three months (September-November) and are around 8.8% now. For AA+ rated bonds with the same tenure, the coupon rates have softened by 50 basis points to 9.28%.
“Softening coupon rate will encourage banks more to go for bond issuance,” said the head of treasury operations of a public sector bank.