Fitch Ratings sees flurry of bank bond issuances

Bank bond issuances are expected to come one after another for the rest of the year as lenders seek to beef up their capitalization levels to replace old securities no longer recognized as appropriate under new regulations.

In a statement this week, Fitch Ratings said apart from replacing existing equity-like debt securities, banks would also seek to boost their capital to support aggressive expansion plans.

“The issuance will be largely driven by the need to refinance legacy instruments and support growth,” the rating firm said Monday.

This comes following the recent implementation of stricter rules on capital under international Basel 3 standards.

A bank’s capital serves as its main buffer against potential losses in case its assets turn toxic.

Capital is made up of two components: tier 1 securities, which are a bank’s common equity, and tier 2 securities, which are more of debt.

Under Basel 3, rules that took effect at the start of the year, tier 2 securities under old regulations could no longer form part of a bank’s capital, forcing banks to replace these IOUs. Basel 3-compliant tier 2 notes have “loss-absorption” features, which means holders of these notes would not receive the usual preferential treatment that a bank’s creditors get in case of liquidation.

According to Fitch, banks have issued about P50 billion in Basel 3-compliant tier 2 instruments in the past few months, in response to the new rules.

The issuance of these new types of instruments compares with the over P120 billion in tier 2 notes that were issued under old rules.

These notes, Fitch said, “must be replaced eventually.”

The Bangko Sentral ng Pilipinas (BSP) estimates that about 3 to 3.5 percentage points were shaved off the banking industry’s total capital adequacy ratio (CAR) due to Basel 3 rules.

A bank’s CAR is a measure of its level of capital relative to risk-weighted assets.

At the end of last year, the country’s major banks had a CAR of 17.65 percent, significantly higher than the minimum 10 percent prescribed by regulators.

Fitch said the banks’ desire to continue growing would also drive issuances of fresh capital.

Loan growth averaged at 15 percent over the past year, Fitch said.

“The banking system is considered well capitalized with healthy capital buffers… but these buffers may erode in a rapidly growing system,” it said.

Government-owned Development Bank of the Philippines was the first to issue Basel 3-compliant securities in November 2013, with its issuance of P10 billion in tier 2 instruments.

“Activity picked up following Basel 3 implementation in January 2014, with issuance to date limited to the local market amid more favorable pricing for the banks and healthy domestic demand from institutional investors and trust accounts,” Fitch said.

The latest bank to issue new tier 2 notes was Metropolitan Bank & Trust Co., which completed the sale of P6.5 billion in IOUs last week.

The tier 2 notes carried a coupon rate of 5.25 percent a year. They have a tenor of 11 years with an option for the bank to redeem the notes after six years.

The tier 2 issuance, the second in a series for this year, completed the bank’s P22.5-billion fund-raising program.

Earlier, Metrobank received regulatory approval to issue up to $500 million worth of tier 2 notes.