Oriental Bank of Commerce to raise Rs 1,000 cr via Tier-I bonds

The bank needs capital injections from the govt to support loan growth and capital requirements to meet Basel III norms

Public sector lender Oriental Bank of Commerce plans to raise Rs 1,000 crore through additional Tier-I bonds (AT1). The fund will help OBC shore-up its capital adequacy and business growth.

Recently, State Bank of India announced its intent to raise up to Rs 11,000 crore in the next few quarters. IDBI Bank, another Mumbai-based lender, will also issue AT1 worth Rs 1,000 crore by end this month.

India Ratings has assigned an 'A+' rating for OBC's Basel III-compliant AT - 1 bonds with a stable outlook. It also assigned long-term issuer rating of 'AA' to the bank. The outlook is stable.

The rating for OBC's AT1 bonds reflects the bank's standalone credit profile. The rating also reflects ability to service coupons and manage principal write-down risk over the Basel III transition period (till March 2019).

OBCs' coupon omission risks are lower than most peers. For the coupon omission risk, the agency compares the 'years of coupon serviceability' with assumptions on aspects like asset growth and return on assets trajectory. In terms of coupon serviceability, OBC has a relatively high revenue reserve position. It can cover a minimum of 17 years of coupon servicing at any time, according to rating report.

OBC would need capital injections from the Government of India to support loan growth and capital requirements to meet Basel III norms.

The bank will need Rs 5,600 crore of Tier-I capital over FY17-FY19, which is 38.9 per cent of its Q1FY17 common equity Tier-1 (CET 1).

The bank reported a CET1 ratio of 8.59 per cent in the first quarter of the current financial year (4QFY16: 8.52 per cent), compared with the peer median of 7.66 per cent.

Like most public sector banks, OBC's asset quality has also been under pressure over the past few years. Its gross non-performing assets rose to 11.45 per cent at end-June 2016, from 5.7 per cent at the end of September last year.

Its credit costs - provisions for NPAs - will remain high in 2016-17 and 2017-18. The credit costs are expected to be at around 190-200 basis points (bps) in FY17 and FY18. The credit costs were 245 bps in FY16 and 141bps in FY 15.

OBC's provision coverage ratio declined to 49.3 per cent in the first quarter this financial year, from 59.5 per cent a year ago.