Indian banks were beginning to forget what risk capital looks like. It's time to get reacquainted.
State Bank of India has hired arrangers to raise $1 billion by selling securities in international markets, Bloomberg News reports. The last time the bank sold perpetual dollar bonds that would count toward additional Tier 1 capital was in 2007.
Back then, there was no dearth of optimism about India becoming the next economic powerhouse after China. The glow of investor affection allowed the country's lenders to tap stock markets for more than $6 billion. Their combined equity raising in the past four years hasn't surpassed that figure.
As for other higher-risk-absorbing securities such as perps, even the more forgiving domestic markets have insisted on coupons of about 11 percent to 11.5 percent in the four transactions this year by Indian lenders.
Lying by banks about bad loans to corporate borrowers, however, which shut them out of markets for riskier capital, has just about stopped. Nonperforming loans are still high, but it doesn't look like this 8 trillion rupee ($120 billion) problem is going to get much worse. After falling below 0.5 in February, the price-to-book ratio of state-run banks, which dominate lending, has risen to 0.81, a one-year high.
For the private-sector banks, risk capital isn't a problem. Tier 1 capital ratios of Kotak Mahindra Bank, City Union Bank, Federal Bank, HDFC Bank and ICICI Bank range between 13 percent and 15 percent, but at state-run Uco Bank, Syndicate Bank and Indian Overseas Bank they are dangerously low, below 8 percent. Even other government-controlled lenders would struggle to meet the Basel III minimum capital requirement of 11.5 percent, which the Indian central bank will impose from March 2019.
By then, the banks will need to raise $90 billion to fill their capital hole, according to Fitch Ratings. State Bank of India's $1 billion sale will be a sign that investors are no longer as frosty toward the lenders as they have been the past four years. But it won't be easy to recreate the bonhomie of 2007. For that, the banks will have to be on their best behavior.
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The only exception is Dhanlaxmi Bank, a small private-sector lender, which last month failed to pay the coupon on a subordinated bank instrument.
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