Canara Bank to raise Rs 3,400 cr in capital via Additional Tier-I bonds

Public sector lender Canara Bank is planning to raise up to Rs 3,400 crore in capital by issuing fresh Additional Tier-I bonds (AT1) to replace maturing bonds and support growth.

The bonds worth around Rs 2,500 crore are maturing in the current financial year. The bank has not fixed the time for fresh AT1 bonds for now, bank officials said. India Ratings (Indi-Ra) has assigned “AA\stable” rating for proposed offering of AT1 bonds.

The bank is also likely to raise equity capital of up to Rs 2,500 crore from institutional investors in the current quarter (Q2FY22) after announcing results for the first quarter (Q1FY22), bank offcials said. The bank had raised Rs 2,000 crore through another QIP in December 2020. Its capital adequacy ratio (CAR) stood at 13.18 per cent with tier I at 10.08 per cent at end of March 2021.

In May 2021, its board approved a plan to raise up to Rs 9,000 crore in FY22, out of which Rs 2,500 crore will be through a Qualified Institutional Placement (QIP).

Ind-Ra said the bank is unlikely to witness a capital erosion in FY22. It needs about Rs 5,000 crore of equity in FY22-FY23. This would be in addition to its internal accruals to have a Common Eequity Tier 1 (CET1) of around 9 per cent over the medium term.

Meanwhile, the rating agency also revised Canara Bank’s outlook from “Negative” to “Stable”. The upgrade reflects the bank’s ability to absorb the impact of asset quality deterioration in FY21 without material deterioration in credit profile and demonstrated equity raising ability.

The upgrade also reflects the bank's ability to raise equity capital in future and expectations of modest profitability in FY22-FY23 that could help it maintain and possibly grow its market share in advances and deposits.

The rating agency also affirmed Bengaluru-based lender's long-term issuer rating at “AAA”. The affirmation factors in Canara’s systemically important position and expectations that the bank will continue to receive support from the government.

Post Canara Bank’s amalgamation with Syndicate Bank in April 2020, its share in net advances increased to 6.3 per cent at FYE21 (FYE19: 4.6 per cent) and that in deposits to 6.3 per cent (4.9 per cent).

The bank witnessed a sharp improvement in its distributable reserves on an amalgamated basis at end-June 2020. This has significantly enhanced its coupon-paying ability on AT1 instruments. The government's gazette notification (dated March 23, 2020) allowed a nationalised bank to appropriate any sum from its share premium account by following the same procedure as for the reduction of paid-up capital.

This provision reduces the risk of erosion of serviceable distributable reserve, as the bank can set-off its losses through the premium account. Post the above adjustment, Canara’s distributable reserves would have been at 4.3 per cent of the risk weighted assets at FYE21.