23 June 2022 12:23 am Views - 139
The soaring interest rates triggered by the jumbo key rate hike on April 8 have prompted the banks to either delay or cancel their corporate bond issuances as part of their Tier II capital enhancement journey, according to the banking industry sources.
It appears that the sharp increase in interest rates is roiling both the equities and corporate debt capital markets, as investors are finding comfort in government securities, of which the yields have risen to record high levels, albeit some softening was there last month.
Sri Lanka was coming off a record-high level of listed corporate bond issuances in 2021, with 14 companies raising Rs.84 billion in capital via debentures, nearly all of which were by banks and licensed finance companies to bolster their Tier II capital levels.
It was only last week the rating agency ICRA Lanka Limited disclosed that the short-term debt capital market is stung by the soaring interest rates, as investors have lost appeal in the commercial papers.
Corporate debentures have been a popular instrument among the banks to raise capital to meet BASEL III capital requirements. They ramped up these bond issuances in the last four to five years to stay in line with the enhanced capital adequacy ratios under the new BASEL rules.
Hence, this delay in raising capital via corporate debentures could interrupt banks’ capital enhancement journey.
However, on the other hand, the banks may also witness less need for urgent capital after their aggressive lending drive came to a halt this year.
Nevertheless, it remains uncertain to what extent the banks may be able to absorb the losses coming from the sovereign debt default and heightened credit quality concerns, as the borrowers lost their debt serviceability with the collapse of the economy amid the sharp increase in lending rates.
According to the data available through the end of 2021, the licensed commercial banks had a Tier I capital adequacy ratio and a Tier II or total capital adequacy ratio of 13.2 percent and 16.7 percent, respectively, whereas the regulatory minimums were 8.0 percent and 12.0 percent, respectively.
However, both ratios came under pressure in the three months ended on March 31, 2022, due to the massive provisions made by the banks against both their financial investments held in foreign currency-denominated government securities and loans, to absorb the shock of the collapse of the Sri Lankan economy, which is sending shock waves across financial and lending markets.