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Business News/ Industry / Credit quality worries hit bank bond issues
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Credit quality worries hit bank bond issues

Banks rated AA and below have been the worst affected as investors are fearing a rating downgrade

As of September 2015, the ratio of stressed advances (including restructured loans and gross bad loans) to total advances in the banking system rose to 11.3%, from 11.1% in March, according to data from the Reserve Bank of India. Photo: Pradeep Gaur/MintPremium
As of September 2015, the ratio of stressed advances (including restructured loans and gross bad loans) to total advances in the banking system rose to 11.3%, from 11.1% in March, according to data from the Reserve Bank of India.
Photo: Pradeep Gaur/Mint

Mumbai: Public sector banks are finding themselves stuck between a rock and a hard place as the attempt to clean up their balance sheets, which led to a surge in reported bad loans, is driving away investors who would otherwise be willing to lend them capital.

Lenders hoping to raise capital from the bond market are facing a tough time and two out of seven banks looking to issue bonds between January and March have deferred their plans. Some banks successful in raising funds have had to fork out higher yields to lure investors.

Banks rated AA and below have been the worst affected as investors are fearing a downgrade in their credit rating following the release of their December quarter earnings.

In a report released on Wednesday, rating agency Crisil said the intensifying asset quality problems at public sector banks (PSBs) have the potential to impair their credit risk profiles.

This fear is keeping some investors away.

“The yields demanded by investors have been rising. Investors such as provident funds can only buy AA and above rated papers and if they buy AA papers, a downgrade can create an issue for them," said Ajay Manglunia, head of fixed income at Edelweiss Securities.

To be fair, the demand for higher yields is not entirely due to the perception of increased risk surrounding PSBs. Tight liquidity conditions and rising government bond yields have also pushed yields on bonds issued by corporates and banks. Since January, the yield on AAA-rated 10-year corporate bonds has risen by 10 basis points (bps). One basis point is one-hundredth of a percentage point.

In some cases, the demand for higher yields has led to issues being deferred. Both Bank of Maharashtra and Punjab & Sind Bank pushed back plans to raise funds through bonds as markets were demanding interest rates at least 5 bps higher than what the banks were comfortable with.

Bank of Maharashtra first announced its intention to raise 1,000 crore through tier-II bonds on 28 January by seeking bids from investors. The lender had to shelve its issue in the first week of February as the lowest yield at which an investor was willing to buy was 9.40%, 20-30 bps higher than the going rate for a similar-rated PSB.

Punjab & Sind Bank faced a similar issue. The lender asked investors to bid for its tier-II bonds to raise 500 crore on 15 January. However, it deferred its issue on 20 January and has not intimated when it will come to the market next.

Sidharth Rath, head of treasury at Axis Bank, pointed out that long-term investors such as insurance companies and provident funds are allowed by regulation to invest in papers that have a minimum rating of AA.

“The fear is definitely that with asset quality pressures, the banks might face a rating downgrade going forward," he said.

Post downgrade, the investments by insurance firms and provident funds in such papers would be considered a breach of regulations.

The concerns raised by investors appear to be justified, given the quality of earnings reported by PSBs. Dena Bank, Allahabad Bank, Central Bank of India and Indian Overseas Bank (IOB) have all posted a quarterly loss owing to a rise in bad loans and provisions.

“Looking at the asset quality of the banks, the possibility of a downgrade is higher now, which is the chief concern of investors," said a bond arranger, requesting anonymity.

So far in 2016, YES Bank, Vijaya Bank, Dena Bank, Bank of India (BoI) and State Bank of Mysore have raised capital through tier-I and tier-II bonds, adding up to about 4,600 crore.

Even banks that have been successful in borrowing through bonds have had to sweat for it. BoI had to postpone its bond issuance once before it finally raised 3,000 crore through tier-II instruments on 1 January.

According to three bond arrangers, most of these banks directly placed their bonds with provident funds instead of the normal practice of appointing bond arrangers and calling for bids from investors.

“Most of the bank bonds have been direct placements with either EPFO (Employees Provident Fund Organization) or LIC (Life Insurance Corporation), but they are also reaching their limits," said a second bond arra-nger, also requesting anonymity.

Some banks are finding investors in unexpected corners as well. A case in point is Dena Bank, which raised 1,000 crore last week by directly placing its tier-I bonds with Power Finance Corporation (PFC). However, the public sector bank had to pay 10.90% as yield on these bonds.

Tier-I bonds, also called perpetual bonds, do not have a fixed tenure and hence demand a higher premium compared with other bank bonds. The last time Dena Bank raised money through such bonds was in March 2015, when it paid 10.20% as yield. The bonds of the public sector lender are rated AA– by CARE Ratings and AAA by Crisil.

“We were able to raise the funds at a reasonable rate as we went to PFC before anyone else. The entire 1,000 crore amount was raised through bond sales to PFC," said a senior official at Dena Bank on condition of anonymity as he is not allowed to speak to the media.

PFC is a regular issuer of bonds and one of the biggest borrowers from the bond market. However, it has not been known to buy bank bonds in large quantities in the past.

Others PSBs such as IOB are even considering going for a public issue of bonds to raise capital. “IOB is in talks with some arrangers to discuss the possibility of a retail issue as they are not getting much success in finding investors through the private placement mode," said the first bond arranger quoted above.

As of September 2015, the ratio of stressed advances (including restructured loans and gross bad loans) to total advances in the banking system rose to 11.3%, from 11.1% in March, according to data from the Reserve Bank of India.

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Published: 11 Feb 2016, 12:26 AM IST
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