Tue, Sep 08, 2020 – 5:50 AM
ASIAN banks have largely been conserving capital by trimming dividends or offering scrip options amid the pandemic, and there are opportunities for them to raise debt from yield-starved investors to further shore up capital, said analysts.
But if the pandemic intensifies, some banks are also expected to "seriously consider" rights issues and private placements to raise fresh equity, said Eugene Tarzimanov, senior credit officer at Moody's Investors Service.
Over the next few months, banks in the region are expected to continue issuing Tier 2 and AT1 instruments to refinance maturing or called instruments, and to improve their overall capital adequacy, said Moody's Investors Service.
OCBC this month raised US$1 billion in subordinated notes – its largest such issue in six years – amid strong subscription interest. The notes will bear a coupon of 1.832 per cent per annum until the call date of Sept 10, 2025.
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Phillip Securities research analyst Tay Wee Kuang told The Business Times that current macroeconomic conditions may be more favourable for banks to undertake debt issuance to strengthen their capital position.
With global monetary easing "pushing achievable coupons to very low levels", banks may seek to average down their cost of such capital, or refresh their Tier 2 and additional Tier 1 (AT1) maturity profile, added Priscilla Tjitra, associate director at Fitch Ratings in Asia-Pacific.
Existing ratings, depth of domestic bond markets and investor appetite for a particular bank and debt structure will be among leading factors for debt issuance, said Ms Tjitra, though there is "no obvious impetus" for Singapore and Malaysian banks to rush into raising debt.
Singapore's banking trio have built up healthy capital buffers following calls from the regulator to limit dividend payouts this year.
As at the second quarter, DBS's common equity Tier 1 (CET1) ratio stood at 13.7 per cent; OCBC at 14.2 per cent and UOB at 14 per cent. Even as credit costs mount with guidance of 50 to 60 basis points of loans at the local banks, the trio's capital ratios can be maintained above their target of 12.5 to 13.5 per cent, said Phillip Securities' Mr Tay.
Over in Malaysia, the banking sector's overall CET1 ratio stood at 14.9 per cent as at July. The banks had in Q2 held back dividends – the first move to conserve capital and "wait out" before assessing the impact from the Covid-19 crisis, said Mr Tay.
What is not paid out as dividends goes into retained earnings, which make up core capital.
While the Malaysian banks' capital ratios are generally maintained at higher levels, higher non-performing loans (NPLs) could hit capital positions harder, noted Mr Tay, even as there is no "urgent need" to build up excessive capital position.
S&P Global Ratings analyst Ivan Tan told BT that Singapore and Malaysian banks are more likely to increase provision coverage for NPLs, particularly for borrowers impacted by the pandemic.
For equity issuance, existing shareholder structure and recent bank performance and stock valuations will be among key considerations, said Fitch Ratings' Ms Tjitra.
With banks in the region generally well-capitalised, Moody's Mr Tarzimanov said these banks will maintain "good market access" if they need to raise new capital.
But Phillip Securities' Mr Tay thinks banks will avoid rights issues if they can as they are "generally scorned upon" by investors due to their dilutive nature, especially for minority stakeholders.
S&P's Mr Tan added: "Singapore and Malaysian banks will be more inclined towards capital conservation, rather than equity raising, under current challenging operatinRead More – Source