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Categories
| Why Public Bank plans ringgit funds |
| Features | |||
| Written by Yong Yen Nie | |||
| Monday, 03 August 2009 00:00 | |||
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Such is the public’s perception of the bank that few in the industry doubt the judgement of its management team. So when the bank recently announced that it plans to replace its US dollar-denominated subordinated papers with ringgit debt papers, nobody batted an eyelid. The amount that the bank will raise via the ringgit papers has not been determined yet but PBB has stated that it intends to redeem the entire issue of US dollar-denominated subordinated debt of US$350 million due in 2014 that it had issued in 2004. In place of the US dollar-denominated sub-debt papers would be ringgit-denominated subordinated bonds that PBB is looking at raising later this year. Its redemption exercise does not really come as a surprise as EON Bank also redeemed its US dollar-denominated debt papers that qualify as Tier-2 capital in January this year. EON Bank replaced the US dollar papers with ringgit-denominated debt papers because the former would become more expensive if not redeemed early. The question here is one of timing because going to the debt market is still relatively expensive. Industry observers say it is generally more expensive to call the debt papers before they mature — given the cost of raising new debt — compared with paying step-up rates to investors. However, PBB’s chief operating officer Leong Kwok Nyem tells The Edge that short-term rates are at historical lows at the present time, making it more efficient for the banking group to raise funds in the ringgit market. The low short-term rates are driven mainly by the country’s current low interest rate of 2%. Leong says although the banking group’s US dollar-denominated subordinated debt has yet to mature, it is redeeming the papers this Sept 22 to meet investor expectation that the sub-debt will be redeemed at its optional date and not its final maturity date. “At the time of issuing the sub-debt and innovative Tier-1 capital securities, Public Bank provided for an optional redemption, which, for the sub-debt, is five years prior to the final maturity. Investors of the sub-debt had priced the sub-debt at a tenor to the optional redemption date rather than the final maturity date,” he adds. “There is therefore an expectation by investors that the sub-debt will be redeemed by the bank exercising its call option to redeem the US dollar sub-debt on its optional redemption date.” Leong says the terms of the issue provided for full redemption on the optional redemption date. According to PBB’s announcement to Bursa Malaysia in 2004, the subordinated bonds, which were listed on the Singapore Exchange that year, would have a step-up this year at a coupon rate of 5.625%. Leong says the step-up rate would be 1.5% should PBB not redeem the sub-debt papers this September. While it is more expensive for PBB to call in the sub-debt papers and refinance it with ringgit papers than pay the step-up rates, it is better for issuers to redeem the sub-debt papers at optional redemption dates, which come earlier than the maturity dates, an industry observer says. “This is to avoid causing nervousness among investors, which does not bode well for the issuers’ future financing plans — investors may impose higher yields for future debt issuances,” says the industry observer. Hence, it is no surprise that PBB is redeeming its US dollar-denominated sub-debt papers earlier. The question is, will PBB’s core capital ratio be lowered following the redemption exercise? EON Bank’s core capital ratio fell about 10% less than three weeks after it redeemed its US dollar papers and before its ringgit papers came into its capital structure. AmResearch’s deputy research head Fiona Leong says although PBB’s core capital ratio may drop after the redemption of its US dollar-denominated subordinated papers in September, this is expected to be temporary and its capital ratio will still be above 10%. “PBB has a progressive capital-raising plan and it has already put in place the necessary capital-raising programmes that will ensure that its core capital ratio is intact,” she says. As at June 30, 2009, PBB’s core capital ratio stood at 12.2% prior to giving out dividends and at 11.2% after that. Leong says after the redemption exercise, PBB may tap the ringgit subordinated note market via the issuance of subordinated notes from its RM5 billion medium-term subordinated note programme. However, he says the amount has not been determined at this point in time. “We plan capital management on a continuous basis. We don’t just raise such debt capital instruments when an issue is redeemed. Thus, we look at our medium-term needs for capital in any decision to issue any form of debt capital, be it sub-debt or non-innovative Tier-1 capital securities,” he says. PBB has already raised RM1.4 billion subordinated notes under its RM5 billion medium-term note (MTN) programme announced last year, which is part of the banking group’s medium-term capital management plan, he adds. That took into account the forthcoming redemption of US$350 million worth of subordinated debt papers, Leong says. “Therefore, there is no need for Public Bank to raise the same amount now to redeem the US$350 million sub-debt this September.” In March this year, the banking group also obtained approval to issue up to RM5 billion of non-cumulative perpetual capital securities that are stapled to subordinated notes classified as Tier-1 capital. PBB said it had raised RM1.2 billion out of the RM5 billion non-innovative Tier-1 capital programme, and that it was looking at raising more out of the programme later this year. Analysts say PBB’s move to raise more capital is in line with its strong loan growth. The banking group said its targeted loan growth of between 14% and 15% for FY2009 is on track, while its net non-performing loan ratio is expected to remain less than 1% throughout the year. PBB’s core capital ratio is also expected to increase by 0.6% to 0.8%, following the full adoption of the Financial Reporting Standard (FRS) 139 come Jan 1, 2010. In a recent research note, AmResearch says the adoption of FRS 139 will result in potential savings on general provisions that the banking group needs to set aside each year. “Besides the positive impact on earnings, management estimates that about 50% of the bank’s general provisions of RM1.54 billion as at June 2009 would be reclassified as reserves. This would boost the bank’s Tier-1 capital ratio,” it says. In that respect, PBB’s active capital management strategy will ensure that the banking group grows slowly but surely. This article appeared in Corporate page of The Edge Malaysia, Issue 766, Aug 3-9, 2009.
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