ComBank to raise up to Rs.10bn via convertible debentures

• Largest private lender to beef up capital ahead of BASEL III 2019 deadline    

Commercial Bank of Sri Lanka PLC (ComBank) announced they would raise extra capital by way of debentures convertible into equity as the private lender braces for higher capital adequacy requirements set to kick in from January 2019 under the new BASEL accord now in place.     

ComBank, Sri Lanka’s largest private lender by assets, in a stock filing made after trading hours last week said the bank had decided to issue 50 million listed, rated, redeemable, subordinated BASEL III compliant debentures at Rs.100 each with a non-viability conversion feature to raise Rs.5.0 billion.

The bank will issue a further 50 million of such debentures in the event of an oversubscription of the first tranche bringing the total amount to be raised up to Rs.10 billion. 

The debentures will carry tenors between 5 and 10 years and is subject to all regulatory and shareholder approvals. 

This is the second such major capital boost move by Commercial Bank within a year as the bank raised Rs.10 billion in a rights issue last year ahead of the BASEL III rules, which came into effect on July 1, 2017 and the full implementation set to kick in from early 2019. 

Fitch Rating in a recent note predicted significant increase in issuances of BASEL III compliant Tier 2 instruments in 2018 by Sri Lankan lenders. 

“Most banks will need to raise capital to meet higher BASEL III requirements that take full effect in January 2019, and to support balance-sheet expansion. 

Banks will also need to undertake significant BASEL III Tier II issuance as a result of the phasing out of legacy instruments - and ongoing instruments”, Fitch Ratings said in a note on January 8. 

So far, Sampath Bank PLC undertook a public issuance of BASEL III compliant Tier II instrument and Seylan Bank PLC and Nations Trust Bank PLC have also announced similar issuances.

By early 2019, the Common Equity Tier I (CET 1) ratio of banks, with assets over Rs.500 billion, which are considered as systematically important ones, will need to be maintained at 8.5 percent at the minimum while the Tier I ratio will be maintained at 10 percent, up from the current 7.375 percent and 8.875 percent respectively.
The Tier II capital adequacy ratio of such banks will needs to be maintained at 14 percent from the current 12.875 percent. 

As of September 30, 2017, ComBank’s three ratios stood at 12.30 percent each for CET I and Tier I capital adequacy ratios and 16.24 percent under total capital adequacy ratio—well above even the January 2019 targets. 

However, the capital adequacy ratio depletes when the assets/loans grow and banks need to plan for new capital well before of the regulatory new minimums kick in.