National Savings Bank (NSB) has proposed to raise Rs.5.0 billion via an equity-like bond to bolster its additional Tier I capital and the affiliated capital adequacy levels, which are already at comfortable levels compared to the regulatory minimums.
The BASEL III compliant, unlisted, and perpetual bond, which has characteristics of unsecured and subordinated to other debt instruments, was rated at AA (hyb) with a Stable outlook by ICRA Lanka Limited, one notch lower than other subordinated bonds of the bank due to its loss absorption feature through write-downs as determined by the Monetary Board, which makes the bond riskier.
“The letters ‘hyb’ in parenthesis suffixed to a rating symbol stand for ‘hybrid’, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features, which may translate into higher levels of rating transition and loss severity vis-à-vis conventional debt instruments,” the rating agency said.
ICRA Lanka rates other issues of the bank—its Rs.20 billion senior debenture at AAA and Rs.6.0 billion subordinated debenture at AA+ both with a Stable outlook while the issuer, NSB, is rated at AAA. The State-banking heavyweight Bank of Ceylon (BOC) in June announced a similar sized bond issuance to strengthen its capital profile, more particularly its additional Tier I capital.
NSB had Tier I and total capital adequacy ratios of 10.96 percent and 13.25 percent respectively by end-June, compared to the regulatory minimums of 8.0 percent and 12.0 percent for each.
Meanwhile, the bank’s core capital, which consists of pure equity, stood at Rs.44 billion, compared to the Rs.7.5 billion regulatory minimum threshold set for the licensed specialised banks by the Monetary Board by December 31, 2022.
“Based on ICRA Lanka’s computation, the bank will not require Tier-I capital infusion for the next 3 years to maintain a 10-15 percent growth factoring 2 percent capital buffer and 9 percent internal capital generation,” the rating agency opined.
For the six months ended in June 2020, NSB with assets of Rs.1.24 trillion reported earnings of Rs.1.06 billion camped to Rs.2.29 billion in the corresponding period in 2019.
The narrowing margins amid falling interest rates, Rs.3.3 billion day-one loss stemmed from the moratorium offered to the pandemic-hit borrowers and higher credit costs weighed on the bank’s bottom line.