KOCHI: The Thrissur-headquartered South Indian Bank (SIB) is likely to exercise the ‘call option’ to redeem its ‘expensive’ Rs500 crore Tier 1 bonds in January 2025.
These Tier 1 bonds were issued in January 2020, likely to shore up SIB’s relatively low Capital Adequacy Ratio (CAR), which was hovering just above 13 per cent during that time.
Minimum CAR
As per the Reserve Bank of India (RBI) capital adequacy norms, the scheduled commercial banks are required to enjoy a capital adequacy ratio of 11.5 per cent, including a capital conservation buffer of 2.5 per cent.
Out of the 11.5 per cent, a minimum of 8 per cent should be Tier 1 capital. And the Tier 1 bonds that are likely to be repurchased by SIB in January 2025, have been serving the purpose of Tier 1 capital for the bank.
Tier 1 bond
“The typical inherent risk attached to a Tier 1 bond necessitates the issuer to offer higher coupon rates to attract investors to subscribe to Tier 1 bonds. And this explains the reason why the SIB’s Tier 1 bond carries high coupon,” said a banking expert while explaining the characteristics of bonds to businessbenchmark.news.
SIB Tier 1 bond carries a coupon rate of 13.75 per cent, making it costly for the issuer. Therefore, once SIB achieves a comfortable capital base, redeeming such bonds becomes a priority to reduce the interest burden.
Healthy CAR
As of June end, 2024, SIB achieved a comfortable CAR of 18.11 per cent. The bank is entitled to redeem the bonds after five years of issue date since the issue was embedded with a call option, allowing it to repurchase the bonds at a predetermined price before maturity, and the earliest date falls on January 24, 2025.
June 26 redemption
On June 26, 2024, SIB had redeemed another Rs250 crore Tier 2 bonds that carried a coupon rate of 11.75 per cent, presumably as part of the interest reduction strategy.
The huge NPA portfolio the bank has been carrying for more than five years, and its attendant provisioning requirements have denied the bank any opportunity to build a healthy capital base for years together.
And this had obviously necessitated the bank to issue bonds being the shortest and least-cumbersome route to raise capital.
Bond portfolio
Currently, SIB’s bond portfolio has Rs300 crore Tier 2 bonds maturing on October 31, 2025, carrying a coupon rate of 10.25 per cent; another Rs490 crore Tier 2 bonds with a coupon rate of 9.5 per cent and maturing on May 28, 2028.
And the only Tier 1 bond is the Rs500 crore bond that may be redeemed by the bank by January next. Explaining the consequences of the likely redemption of the Tier 1 bond by SIB, an expert said that the redemption could bring down the capital adequacy ratio by about one per cent.
“But the ensuing quarters could release profits to the tune of about Rs300 crore each at the given run-rate, and ultimately by the end of the 2024-25 (FY25) financial year, the bank could be seen adding up at least Rs1,000 crore more to the capital base in the form of profit,” he further said.
