* Banks plan Tier 1 capital-eligible bonds in dollars
* Local investors still resist debt with write-down option
* Deals expected to be first in Asia with write-up feature
By Manju Dalal
SINGAPORE, Sept 20 (IFR) - Indian banks are set to turn to
the international markets to supplement their regulatory
capital, potentially paving the way for Asia's first US dollar
issues of Tier 1 securities under the new Basel regime.
IDBI Bank and Bank of India, among other lenders, are
already studying the feasibility of issuing additional Tier 1
capital overseas, according to sources familiar with the
Although in their infancy, the deals could set a template
for a string of capital raisings from India's overstretched
banking sector - especially from state-owned lenders.
Overseas capital raisings would ease some pressure on the
government, which has already pledged to pump Rs140bn
(US$2.21bn) of fresh equity into its state-owned banks. Such a
move would also boost India's foreign exchange position and
highlight its ability to attract international investment,
helping support the embattled rupee after a near-20% plunge
against the US dollar over the summer.
The Reserve Bank of India estimates banks need to raise
Rs5trn of new capital in the next six years to March 2018. Of
this, common equity is likely to be around Rs1.75trn, while the
remaining Rs3.25trn will come from capital-eligible debt,
including around Rs1.9trn of additional Tier 1 bonds.
Bankers reckon the first offshore Tier 1 issues will
definitely arrive before the end of the Indian financial year on
March 31 2014, most likely from state-owned lenders that account
for over 70% of the banking sector.
Concrete plans for Tier 1 issues are unlikely to emerge
before the government finalises the capital infusion into the
state-owned lenders - expected next month.
This capital infusion is supposed to bring the Tier 1
capital of state-owned banks above the RBI's required 8% capital
adequacy ratio. The Tier 1 capital adequacy ratio of IDBI Bank,
Indian Overseas Bank, Bank of Maharashtra and Dena Bank stands
at below the required 8% level, according to analysts.
WRITE DOWN, WRITE UP
The interest in overseas capital-raising indicates a lack of
appetite for loss-absorbing capital in India's local market.
Domestic investors have hesitated to embrace Basel-III
compliant capital issues so far. Only one has priced in the
rupee market, a Tier 2 bond from United Bank of India in June,
and it ended up as a bilateral deal with Life Insurance Corp of
India. A second Rs15bn Tier 2 bond from Bank of India is likely
to end up the same way.
A US dollar issue, however, promises to usher in a new
structure for the Asian bank capital market, since the RBI is
the only regulator in the region to have explicitly allowed the
reinstatement of capital if the financial condition of a lender
Under Basel III rules, all additional Tier 1 instruments
must absorb losses, either through conversion to equity or
temporary write-offs, at the point that a bank becomes
non-viable. This is defined in India as a Tier 1 capital ratio
of 6.125% or below.
RBI also provides for a write-back of the Tier 1 capital
when the financial condition of the bank improves, allowing
holders of such instruments to share in the upside potential in
the same way as common equity holders. These write-ups are
subject to conditions, such as the bank having to wait for a
year after paying its first dividend after breaching the
The aggregate write-back is restricted to a certain
percentage of the dividend declared during a year, and limited
to up to 25% of the amount of the dividend paid a particular
That may allow Indian banks to mimic a structure Societe
Generale introduced at the end of August. SocGen (A2/A/A) raised
US$1.25bn through the issuance of a perpetual hybrid
subordinated bond, paying a coupon of 8.25%. With an order book
of US$4bn, SocGen's deal offered a "temporary write-down"
feature in which the bonds would temporarily be wiped out if the
bank's core capital ratio fell below 5.125%.
"The write-ups will be preferred by investors as these are
more positive than the binary view of a conversion of the
capital into equity or a write-down on hitting the trigger,"
said a Singapore-based DCM banker. "However, I am not sure if
the pricing of these Tier 1 bonds will have much bearing because
of the write-ups as these features are essentially tail risks
No Asian issuer has yet sold Tier 1 securities in the public
US dollar market under the Basel III rules, but the first Tier 2
dollar issue is expected as soon as next week.
Philippine lender Metropolitan Bank and Hong Kong-based ICBC
Asia are discussing separately new-style Tier 2 bonds with