SIB Tier 1 bond coupon rate triggers debate on pricing

THRISSUR: The pricing of the Rs500 crore Additional Tier 1 (AT1) bonds issued by South Indian Bank (SIB) a few days back has triggered a debate, with a section of the market dubbing the 13.75 per cent coupon as too high.

SIB has ‘paid the price’ for boosting its Tier 1 capital base by Rs500 crore that helped the bank achieve a Tier 1 ratio of about 10 per cent and also take the capital adequacy ratio (CAR) up from 12.02 per cent to close to 13 per cent, which will help the bank overcome any capital constraints the bank may face in its growth journey in the future.

The fact that hardly any Additional Tier1 (AT1) bonds issued by banks or financial institutions currently offer a yield around 13.75 per cent takes the debate to a different dimension.

Yes bank whose Tier 1 bonds offering yields of around 23 per cent even recently may be treated as an exception given the untoward developments that have befallen the bank in the past more than a year with uncertainty on capital infusion still looming large.

An informed source confirmed to that the SIB bonds were private placed with about 7 institutions. As per prospectus, individuals cannot participate in the primary issue of Tier 1 bonds. But in secondary market, all advisors will be seen pitching these securities to their individual investors.

“I think investing in SIB Tier 1 bond that yields 13.75 per cent could be a good investment now given the fact that SIB has a good track record and has been reporting profit quarter after quarter,” said Vikram Dalal, managing director, Synergee Capital Services Pvt Ltd, a Mumbai-based firm specialising in fixed income products.

The Tier 1 bonds issued by financial institutions such as Syndicate Bank, Indusind Bank, Chola MS, Tata Power or the Kerala-headquartered gold loan company, Muthoot Finance, are traded at yields less than 11 per cent currently.

But as one top official at SIB explained, these banks or financial institutions enjoy higher credit ratings than SIB. Here, the moot question one would naturally raise is whether a one or two notch rating disadvantage can drive up a 2.5 percentage points’ (250 basis points) difference in the coupon rate as happened with the said SIB Tier 1 bond.

“There are other factors too that determine a bond coupon. One has to consider the appetite level for bonds in the market at a given time, and it may also be noted that the continuous market beating suffered by SIB shares on the stock markets in the past close to a year, which is quite unwarranted, I would say, has cast a dark shadow on our reputation,” the SIB official lamented.

To make matters worse, India Ratings and Research recently lowered its ratings on SIB’s lower Tier II bonds & Tier II bonds (Basel III complaint) worth Rs1490 crore to IND A+/Negative from IND A+/Stable.

“The rating reflects higher proportion of stressed assets to net worth, subdued profitability along with lower provision coverage compared with peer banks, thereby increasing the importance of raising Tier I capital in the medium term,” a report had noted.

While the debate in the market surrounds whether the interest committed by SIB was on the higher side, it remains a fact that the bank could not have gone the equity dilution route to raise Tier 1 capital  at this juncture when the bank’s shares are traded at ‘unjustifiably’ low prices – just above one-third of its book value.

This is in contrast to the shares of CSB Bank from the same town, being traded at almost twice the book value (though it is steadily coming down, of late) despite being a bank with much worse track record.

But there is another comparison that works against SIB’s Tier 1 bonds. Some analysts have reminded that Dhanlaxmi Bank, another bank from the same geography but with much smaller size, had issued Tier 1 bonds in 2018 at a coupon of around 11 per cent when the bank was not in its pink and also when the repo was certainly higher than the present 5.15 per cent, the lowest since March 2010.

A top official of another Kerala-based bank had told two years ago that quite often than not, the bank management helps select high networth clients (mostly institutions) of the bank to lap up these bonds that yield high interest rates by converting their fixed deposits lying with the banks into investments in Tier 1 bonds.

SIB’s MD and CEO, VG Mathew himself explained why the bank dumped the idea of a share issue to raise Tier 1 capital this time. “This is not an appropriate time to dilute the equity as this will not help the shareholders of the bank either. I am sure the worst phase is over, and before long the shares will get re-rated, but until that time it may not be rational on the bank’s side to issue fresh shares.

The bank has crossed the landmark of Rs1.5 lakh crore of total business as on December 31, 2019. Mathew said the bank has been able to meet the targeted levels of recovery/ upgrades which has helped in containing the GNPA level at 4.96 per cent.

The provision coverage ratio (PCR) of the bank has improved to 50.37 per cent from 41.17 per cent a year ago. Bank has a clear action plan for further improving the PCR in a phased manner, he said.

SIB that has seemingly developed an aversion for corporate loans, of late, could bring down the corporate exposure from 35 per cent of the loan book to 30 per cent during the last one year, in line with its strategy of reducing large corporate exposure.





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