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Billionaire banker seeks solace in bonds as share sale stymied

[MUMBAI] Yes Bank Ltd's billionaire chief Rana Kapoor says he will consider bond sales every year to bolster capital, signaling a new-found appreciation of the debt market after a US$1 billion share sale faltered in September.

Strong investor interest in a US$441 million perpetual bond sale last month has now given Kapoor confidence in similar transactions to raise his Mumbai-based bank's buffers against potential losses, he told reporters last week. The sale of the additional Tier 1 bonds bolstered the lender's capital adequacy ratio by 150 basis points, Deutsche Bank AG analysts led by Manish Karwa said in a Jan 20 note.

Yes Bank, which has the fastest pace of loan growth among Indian lenders, sold the bonds after a stock slump three months ago prompted it to defer a share sale to institutional investors - a delay the firm blamed on a "misinterpretation" of rules for such placements. Kapoor's comments may quell speculation that the company will soon revisit the sale.

"Our capital position is comfortable," the Yes Bank founder and chief executive officer said Jan. 19 after the lender reported third-quarter profit that beat analysts' estimates. "As investor interest in the perpetual bonds was strong, we will consider coming back to this market every year. There is no pressing need to raise capital by a share sale now." The so-called AT1 bonds helped boost Yes Bank's overall capital adequacy ratio to 16.9 per cent as of Dec. 31 from 15 per cent three months earlier, exchange filings show. The bonds don't count toward the lender's common-equity Tier 1 capital ratio, which still rose 20 basis points over the three months to 9.9 per cent, according to the Deutsche Bank report.

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The bank delayed its share sale amid an early September slump that saw the stock tumble 19 per cent, though it has recouped almost all of its losses since then. That's a positive sign for any future equity capital-raising efforts that the company may need to sustain its loan growth. As the lender extends more credit, it will need to sell more equity to ensure it can account for new advances in its CET1 ratio.

The bank's loans grew 39 per cent in the December quarter from a year earlier, according to its earnings filing last week. While growth of about 35 per cent this year is possible, that rate will have to slow down closer to about 23 per cent to 24 per cent next year until it raises capital, according to the Deutsche Bank note.

"While the overall capital ratio is comfortable at this point, a 35 per cent-plus loan growth will need an equity capital boost," said Payal Pandya, a Mumbai-based analyst at Centrum Wealth Management Ltd. "Basel III norms require a minimum of 5.5 per cent CET1 and a bank like Yes would like to keep a cushion over that too." State-owned lenders Vijaya Bank and State Bank of Travancore also joined Yes Bank in selling additional Tier 1 bonds recently. That type of debt is a lender's first line of defense against financial shocks after equity, as its value can be written down and interest payments can be deferred.

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