PNB to raise Rs 1,500 cr via Basel-III bonds

For the bank, cost of capital raised through Basel III instruments is expected to be lower

Public sector lender Punjab National Bank (PNB) plans to raise up to Rs 1,500 crore through Basel-III-compliant Tier-II bonds to shore up its capital adequacy ratio, a senior executive with the Delhi-based bank said. He, however, added that the plans are yet to be firmed up.

The cost of capital raised through Basel-III instruments would be lower because early this week, the Reserve Bank of India (RBI) had eased the rules for these instruments, the PNB executive cited above said.

PNB’s capital adequacy at end-June 2014 was 11.52 per cent, out of which Tier-I was 8.82 per cent. Within Tier-I, common equity was 8.5 per cent and additional Tier-I was 0.31 per cent. The Tier-II capital base was 2.70 per cent.

The bank will ensure that the quantum in Tier-II is always be less than Tier-I, the PNB official added.

Rating agency CRISIL has assigned ‘AAA/Stable’ rating to PNB’s proposed Tier-II bond issue (under Basel-III). These instruments carry a feature - point of non-viability trigger.

The triggering of this provision might result in loss of principal to the investor. Hence, it could lead to default on the instrument by the issuer.

According to Basel-III norms, the PONV trigger will be determined by RBI. The chances of PONV trigger is a remote possibility in the Indian context owing to the robust regulatory and supervisory framework and the systemic importance of the banking sector, CRISIL said.

CRISIL added that the inherent risk associated with the PONV feature is adequately factored into the rating on the instrument of PNB.

PNB has comfortable capitalisation. The bank has large net worth of Rs 35,900 crore as on June 30, 2014 - up from Rs 34,500 crore as on March 31, 2014. The bank has received equity capital infusion of Rs 4,180 crore from Government of India and Life Insurance Corporation of India over the past four years. This includes Rs 500 crore received in 2013-14.

The Indian government’s stake in PNB - 58.9 per cent as of June 30, 2014 - provides it with some flexibility to raise equity capital over the medium term.