Banks hasten to raise capital base

Interest rates have come off quite a bit and are attractive now.

With ample liquidity in the system, favourable interest rates, and equity markets looking up, banks are quickly moving in to shore up their capital base. There are also concerns that going ahead, coupon rates for debt issuances might not remain favourable.

Last week, Mangalore-based private sector lender Karnataka Bank sought shareholders’ approval to raise Rs 500 crore through a qualified institutional placement (QIP) issue, which involves placing equity shares or securities convertible into equity with select institutional investors.

On Monday, India’s third largest private sector lender Axis Bank announced that it had received shareholders’ approval to raise Rs 3,000 crore through the private placement of debt instruments.

Bapi Munshi, president of treasury at Axis Bank, says raising capital, especially lower Tier-II debt, might become expensive in the second half of 2009. Tier-I capital, or core capital, includes shareholders’ equity, preferred stock and disclosed reserves whereas Tier-II capital mainly consists of subordinated term debt, loan-loss reserves and subordinated term debt.

“There might also be crowding in the debt market. Right now, there is enough liquidity since the credit pick-up is still soft, so banks want to move in advance to make sure they are well-capitalised. We want to avoid a situation like in the third quarter of 2008-09 when we had to pay huge coupons for Tier-II capital,” Munshi said.

Interest rates on debt issuances have come off about 30-40 basis points (bps) from their peak levels, Munshi added. Axis Bank plans to raise Rs 500 crore of Tier-I capital and Rs 2,500 crore of Tier-II capital.

IndusInd Bank plans to raise Rs 250 core of Tier II capital in the second quarter of the current financial year.

“Interest rates are expected to inch up in the next 6-12 months and this will reduce appetite for fixed-income assets. Right now, there is a positive sentiment in the equity markets and investor appetite is bullish. In my view, investors will prefer Tier-I issues over Tier-II issues,” said J Moses Harding, head of global markets at private sector lender IndusInd Bank.