News: Banks line up $ 10 b offshore debt issues

(RTR 17/08/2006) Mumbai - A clutch of banks are looking to raise an estimated $10 billion through offshore hybrid debt issues in coming months to feed rising credit demand in an expanding economy and to meet new capital adequacy rules.

A growing view that Indian debt is a good bet after recent upgrades to investment grade level, plus the country's strong economic prospects, should persuade investors to buy issues from lenders with strong finances, bankers say.

"Their strong balance sheets, robust financials and outstanding management are a very attractive proposition for foreign investors who are looking to buy quality debt," said Madan Menon, co-chief executive at Barclays India.

Gross bad loans fell to 5.2 per cent of total outstanding loans at the end of March 2005, the latest date for which central bank data is available, from 7.2 per cent a year earlier.

In July the central bank authorised banks to raise funds through offshore hybrid debt to augment their capital base before Basel-II rules come in next year. Earlier banks were only allowed to make such issues in the local market.

The cost to banks of raising funds offshore is at least 100 basis points lower than in the local market, bankers say.

UTI Bank was the first to test the water, raising $150 million via 15-year paper earlier this month. It was more than six times oversubscribed and priced at 7.25 per cent.

ICICI Bank, is about to price a $340 million perpetual debt offering, the first of its kind from India, while state-run Bank of India is looking to raise $200 million via 15-year debt.

Bankers say a hybrid debt offering is about 7-8 per centage points cheaper than an equity stake sale. A hybrid debt issue like a perpetual bond is a quasi-equity instrument and qualifies as Tier-I capital in India.

"The rapid loan growth and the upcoming Basel-II norms have obliged banks to shore up their balance sheets and it is cheaper and attractive to issue debt," said Devendran Mahendra, senior credit analyst at HSBC, based in Hong Kong.

BUYING INTO GROWTH

Strong economic growth averaging 8 per cent in the past three years has prompted rating agencies Fitch and Moody's to upgrade India's sovereign ratings, helping the banks to sell debt issues.

"The upgrade endorses the country's economic potential and also enables these banks to get a much finer pricing than local markets which is at least one percentage point more," said Barclays' Menon, who expects banks to raise about $10 billion over the next few months in the overseas market.

In the expanding economy, credit has grown at an annual rate of more than 30 per cent, outpacing the growth in deposits and eroding banks' capital adequacy ratios. The government estimates $12.8 billion has to be raised in the next five years as additional capital to meet the new Basel rules and credit needs.

Bear Stearns says Indian bank bonds are a good investment as they reflect banks' improving performance and rapid growth.

"Though the search for yield is paramount, investors are looking for value and only the top-rung banks can offer this to foreign investors," said John Stuermer, head of Asian emerging markets at Bear Stearns, Singapore.

But as more banks hit the market, spreads could get wider.

"Pricing is very critical and the UTI Bank issue was priced very tightly, indicating strong demand," said John Teng, head of Asian credit research at Nomura International, Hong Kong.

"But Indian banks need to offer a higher rate in the future or investors could get cautious."