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State-owned Dena Bank is planning to raise Basel-III compliant additional Tier 1 (AT1) bonds for an amount of Rs 1,000 crore, through private placement, according to a filing in BSE. These bonds come with a loss absorbency clause, which means in case of stress; banks can write off such investments or convert them into equity if approved by the Reserve Bank of India (RBI).
In recent months many public sector banks have put out plans to raise money by issuing bonds under the AT1 structure, namely Bank of India, IDBI Bank and Bank of Baroda. This will help banks fund their growth and also meet Basel III capital requirements.
Muted earnings growth and increasing bad loans and restructured assets has eroded the capital of public sector banks. With the economy expected to recover only gradually, further stress in asset quality, will eat into their capital. Many of them are just about meeting their capital requirements, which have gone up significantly after the more stringent Basel III norms got implemented from April 2013.
For Dena Bank, as of September 2014, the Tier I capital adequacy ratio under Basel III norms is 7.28 per cent (6.5 per cent norm). The bank has stressed assets (non performing assets + restructured) as high as over 16 per cent as of September. In the first half of 2014-15, the bank’s net profit has halved over last year. While the government holds about 58 per cent stake in the bank, it is unlikely to infuse capital aggressively as in the past.
At a cost
While banks are allowed to issue AT-1 bonds under Basel-III, given the riskier nature of such instruments, banks are expected to offer higher coupons on them as compared with the coupons on conventional instruments.
With the capital requirement of banks likely to go up by March 2019, such Tier I issuances are likely to increase significantly. According to a report by ICRA, while the AT1 requirement for this fiscal year (FY2015) would be around Rs 20,000 crore, in subsequent years, the annual requirement could be as high as Rs 40–50,000 crore.
The scarcity of capital
In the past, weak market and investor appetite has made capital raising difficult for public sector banks. Hence state owned banks have depended on the government for their capital requirements. The government has made capital infusion of Rs 58,600, crore in the last four years (2011-14) with plans to infuse Rs 11,200 crore in 2014-15.
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