1. Foreign investors keen on Indian banks’ AT-I bonds: NS Venkatesh, IDBI Bank

Foreign investors keen on Indian banks’ AT-I bonds: NS Venkatesh, IDBI Bank

NS Venkatesh, executive director and CFO, tells Bhavik Nair in an interview that the lender is likely to be the first bank in the country to issue such an instrument in the offshore markets and AT-I bonds are finding interest from foreign investors.

By: | Published: February 18, 2016 12:18 AM

IDBI Bank had recently received board approval for raising $500 million via Basel-III compliant additional tier-I bonds in the offshore market. NS Venkatesh, executive director and CFO, tells Bhavik Nair in an interview that the lender is likely to be the first bank in the country to issue such an instrument in the offshore markets and AT-I bonds are finding interest from foreign investors.

Excerpts:

Your board has approved raising $500 million via Basel-III compliant additional tier-I (AT-I) bonds in the offshore market. Will you be the first Indian bank to issue AT-I bonds in offshore market under Basel-III norms?

The international market is deep and has diverse set of investors. They have invested into a lot of Basel-III compliant AT-I bonds—also called hybrid debt instruments—from other countries but not from India. We have got an enabling approval from the board and at an appropriate time when the markets look stable, we will definitely look at tapping the market. If we issue the AT-I bonds, we will be the first bank to do it from India under Basel-III norms. Under Basel-II norms, some other banks had issued such instruments a few years back.

AT-I bonds in domestic market usually carry a higher coupon because of their perpetual nature. How do you think the coupon will trend for the offshore AT-I bonds?

In the offshore market, first they consider the senior bond issuances if available, and based on it, they look at whether there is a maturity extension. So, there could be a maturity extension premium which could come in. At the best of the times, between the senior and the tier-I bonds of some of the Chinese banks, the spread has been between 100-150 basis points. At the worst of times, the spread has gone up to 250-300 basis points.

If you raise funds through these offshore AT-I bonds, will you bring the funds back to India?

Not necessarily. You can raise it and park it in your offshore branch and use it for your foreign currency lending. If you bring the funds back to India, then the swap cost will come into picture. Moreover, since this is a perpetual instrument, there will be a question of the period for which you take the swap. It is better if you have a pipeline of foreign currency lending, then match the issuance with that lending so that you don’t have to bring it back to India. And whatever is parked as a capital instrument in the offshore branch counts as a capital instrument here. We have only one offshore branch, i.e. in DIFC Dubai and we will keep the funds in that branch.

Have you spoken to foreign investors regarding this instrument?

We were one of the first banks to have conducted a roadshow in 2014 for these AT-I bonds to educate the investors about the AT-I guidelines that the RBI issued for the Indian market. We had touched base with them at that point and they had showed a lot of interest. We were having sufficient capital then, so we just took the opportunity to touch base with investors to make sure they understood the guidelines. May be we need to do another round of investor education there. As we speak, I understand that there is a lot of interest for the bond issuances from Indian banks.

What was your tier-I capital as of the third quarter? If volatility persists, what would be the alternative mode to raise funds to shore up your tier-I capital?

Our tier-I capital stands at 8.1%. We are well capitalised and are not going to raise funds out of desperation. We have a QIP approval in place, while we also have the non-core investments which we can monetise. We can also rebalance the risk-weighted assets so that we do not have to provide much capital on that front.

What makes you think foreign investors will be confident about banks’ AT-I bonds?

We believe that despite the banks in India making losses, the educated investor outside the country will definitely understand when they see that the government is fully committed towards public sector banks (PSBs) by providing capital. There is no risk in investing into an AT-I bond of a PSB because the government has told they will pump in enough capital to always exceed the Basel-III requirements. So there is no possibility of the non-viability point getting triggered. Also, the regulations permit to pay interest out of reserves. There are enough reserves with PSBs and even in the worst case of the banks making losses in March, they have enough reserves to pay out the coupons. I think the foreign investors should not worry about any default. Moreover, the yields would also be a point of attraction with the risk profile being almost equivalent to that of a senior bond.

Bond yields are touching new highs. What is causing this hardening? And in such a situation, how do you see the borrowing cost of companies trend?

There is a bit of a bearish sentiment that has crept into the market. Besides there is rupee volatility, which is causing some worry. Moreover, additional supply from state loans is also pushing the yields higher. These are the three main reasons that are causing the yields to move up. This is a temporary phase though. The companies may not look at doing a long-term borrowing at this point in time; but will rather look at short-term borrowing and then re-finance it at a later stage. We believe that yields in the longer term will reflect the economic fundamentals of the country. Once the inflation comes down, I think there will be some more room for the RBI to cut rates which will further help in bringing the yields down.

Bond markets have eaten into the share of bank borrowing in a considerable manner. What do you think will be the future trend?

We want an active corporate bond market and if it expands we should not blame the trend. This is a healthy sign. I do not see this as a threat to the bank lending. I think the corporate bond market is moving along and it needs to expand much more so that you have an alternate market determined systems where essentially the credit risk of lending to the corporates gets distributed to various class of investors rather than only residing on the bank balance sheets. I don’t see this trend reversing any time soon and it will continue to show an upward trend over a period of time. This is what is prevalent in the developed markets and we are moving towards it.

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