Tag: union bank

Role reversal: India Inc ‘lending’ to banks via AT-1 bonds

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A role reversal seems to be happening in the Indian financial markets, with India Inc lending to banks instead of borrowing from them.

High returns on investments in Additional Tier-I (AT) bonds issued by public sector banks is proving to be attractive for large corporates even as bank credit to them has declined.

This development comes amid mutual funds avoiding AT-1 bonds (Perpetual Debt Instruments) due to SEBI restrictions.

Given that corporates have substantially deleveraged over the last few years and are sitting on the fence when it comes to fresh capital expenditure, they are channelising their surplus funds parked with banks and mutual funds into AT-1 bonds, according to a fund manager with an MF.

Bank credit to large industries contracted by 1 per cent in September 2021 against a contraction of 0.2 per cent a year ago, per latest RBI data.

Opportunistic investment

The investment by corporates in PSBs’ AT-1 bonds is opportunistic. Banks are offering relatively higher interest rates on these bonds to attract investors after SEBI’s March 2021 circular on “investment in instruments having special features and valuation of perpetual bonds” discouraged MFs from investing in them.

Union Bank of India recently raised ₹2,000 crore via AT-1 bonds at a coupon rate of 8.70 per cent. The PSB had earlier mopped up resources via AT-1 bonds twice — ₹1,000 crore (coupon: 8.64 per cent) in early January 2021 and ₹205 crore (8.73 per cent) late the same month.

Though AT-1 bonds are perpetual in nature, banks usually exercise the call option at the end of five years from the date of issuance. So, a corporate can earn higher returns by investing in these bonds than by parking in a five-year term deposit which fetches about 5.50 per cent.

PSBs are raising resources through AT-1 bonds as they have call options due in the current fiscal and the next on the bonds they had issued earlier. Bank of Baroda, Canara Bank and Punjab National Bank are among the PSBs believed to be considering raising resources via AT-1 route.

MFs shrink away

Among the reasons for MFs to keep away from these bonds is that their maturity is treated as 100 years from their date of issuance for the purpose of valuation as against the current practice of valuing them based on the time left for the next call option date.

So, MFs fear mark-to-market losses due to this change in the valuation norm, for if interest rates rise, the price of longer tenure bonds will depreciate much more than the short-to-medium term instruments.

By ICRA’s estimates based on industry data, MFs held 30 per cent of the outstanding Tier-I bonds and 14 per cent of the outstanding Tier-II bonds as on February 2021.

The credit rating agency assessed that the holding of Basel III compliant AT-I and Tier-II instruments is estimated at 8 per cent of the assets under management of MF schemes holding these instruments, thereby limiting the headroom for incremental investments.

ICRA, in its outlook for the banking sector for FY22, had estimated the Tier-I capital requirements for PSBs at ₹43,000 crore, of which ₹23,000 crore is on account of call options falling due on AT-I bonds, while the balance is estimated as the equity.

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Capri Global and Union Bank to co-lend to MSMEs

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Capri Global Capital Limited (CGCL) has entered into a co-lending agreement with Union Bank of India (UBI) to offer loans to micro, small and medium enterprises (MSMEs) across 100-plus touch points pan-India.

Loan disbursement under this arrangement would commence from December 2021, Capri Global Capital Limited said in a statement.

Financial inclusion

CGCL emphasised that the co-lending agreement aims to enhance last-mile credit and drive financial inclusion to MSMEs by offering secured loans between ₹10 lakhs to ₹1 crore.

The co-lending arrangement will entail joint contribution of credit to prospective MSME customers in Tier 2 and Tier 3 markets.

Rajesh Sharma, Managing Director, Capri Global Capital Limited, observed that through this partnership, the aim is to reach out to a large section of society by offering easy, convenient, and efficient credit solutions and empowering them to be key contributors to fiscal growth.

“Our focus is to support the grassroots entrepreneurship that creates economic value,” he said.

Also see: Equitas SFB ties up with HDFC Bank for co-branded credit cards

Rajkiran Rai G, MD and CEO, Union Bank of India, said, “The partnership with Capri Global Capital Limited is part of UBI’s strategy to support the MSMEs by providing tailor-made financial solutions and accelerating the growth of MSMEs to contribute to the country’s economic development.”

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PSBs line up local AT-1 bonds issues, but private-sector lenders stay away, BFSI News, ET BFSI

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Public sector banks have started issuing AT-1 bonds in the domestic market more than a year after wriding down of such bonds of Yes Bank spooked the market

However, private sector banks are still keeping away and raising money via the instrument overseas, where interest rates are low.

At present, nearly three-four state-owned including SBI, Union Bank, Canara Bank and Bank of Baroda are looking to raise funds through AT-1 bonds.

In March this year, prodded by the Finance Ministry, the Securities and Exchange Board of India (Sebi) had relaxations in valuation norms. However, the main issues that AT1 bonds will continue to be treated as 100-year bonds stayed. The deemed residual maturity of Basel-III AT-1 bonds would be 10-year until March 31, 2022. Sebi said from April to September 2022, it would be valid at 20 years, and from October 2022 to March 2023, it would have a life span of 30 years. From April 2023, the residual maturity will be 100 years from the date of issuance of the bond.

In September SBI Rs 4,000 crore via additional Tier 1 bonds at a coupon rate of 7.72%, the first such issuance in the domestic market after Sebi issued new rules.

The plan

SBI is weighing options to raise money either through local additional tier-1 securities for the third time in this financial year or rupee-denominated ‘masala’ bonds for overseas investors. Bank of Baroda has approved the issuance of AT1 and AT11 bonds worth Rs3000 crore. Capital Raising Committee of our Bank has today approved the issuance of Basel III Compliant Additional Tier 1 (AT1) / Tier II Bonds for an aggregate total issue size of Rs3000cr in single or multiple tranches,” the bank said earlier this month.

What are AT1 bonds?

These are unsecured bonds which have perpetual tenure — or no maturity date. They have a call option, which can be used by the banks to buy these bonds back from investors. AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds are among the largest investors in perpetual debt instruments, and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.

The mutual fund position

Mutual funds, which once used to buy heavily in AT1 bonds, are lukewarm about this asset class after the banking regulator last year ordered that these instruments be written off in Yes Bank’s state-sponsored bailout. Also, on March 10, Sebi had ordered mutual funds to cap ownership of bonds with special features at 10% of the assets of a scheme and value them as 100-year instruments from next month, potentially triggering a redemption wave. Later, the capital markets regulator eased valuation rules but with some riders after the finance ministry asked it to withdraw the directive to mutual funds.

The muted response by MFs had prompted the lenders to tap the overseas market.

Perpetual bond sales by banks have nearly halved to Rs 18,772 crore in FY21 from Rs 34,860 crore three years earlier.



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DHFL recovery lifts PSU banks’ Q2 net profits, offsets Srei group account slip, BFSI News, ET BFSI

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Most top public sector banks have reported steady second-quarter earnings, with lower slippages as the economy opened up and COVID-19 cases fell.

State Bank of India reported a robust performance as it bravely fought off the COVID-19 impact and displayed remarkable resilience in asset quality performance.

India’s largest bank reported a steady quarter, with net earnings growing 67% YoY to Rs 7630 crore, aided by controlled provisions, as asset quality showed remarkable strength, despite the impact of the second Covid wave.

The bank has been reporting continued traction in earnings, led by controlled provisions. However, business trends remain modest, impacted by continued deleveraging by corporates. The bank has been able to maintain a strong control on restructured assets at 1.2% of loans, while the special mention account (SMA) pool declined sharply.

It created a family pension provision of Rs 7,420 crore, instead of amortizing it over five years, thus prudently deploying one-off gains from the DHFL recovery and tax refund. The bank has fully provided for its exposure towards the SREI group.

GNPA/NNPA ratios improved by 42 basis points /25bp quarter on quarter (QoQ) to 4.9%/1.5% as fresh slippage subsided to Rs 4180 crore. Restructured book remained in check at 1.2% of loans, while the SMA pool declined sharply to Rs 6,690 crore (27bp of loans).

According to analysts, the slippage trajectory of the bank is likely to moderate further assuming there is no third Covid wave, while credit cost may undershoot the normal cyclical trends. The bank has a healthy PCR of 70% and holds unutilized Covid-related provisions of Rs 6200 crore.

Canara Bank

State-run Canara Bank reported a three-fold jump in its standalone net profit at Rs 1,333 crore in the quarter ended September, aided by lower bad loan provisioning, rise in non-interest income, and recovery from DHFL resolution. The lender had reported Rs 444 crore profit in the year-ago quarter.

“Despite moderate credit growth of 6% YoY and soft NIMs (Net interest margin), Canara Bank reported a strong beat on PAT versus our estimate, mainly helped by higher treasury income, contained provisions and cash recovery from DHFL,” said Emkay in a note.

Union Bank

Union Bank of India reported healthy earnings, supported by recovery from the DHFL resolution.

The bank reported a PAT of Rs 1530 crore, up 195% year on year, supported by higher recoveries from written-off accounts of Rs 1760 crore, including recovery of

Rs 1,650 crore from the resolution of the DHFL account.

Furthermore, fee income trends improved, while domestic margins declined; muted loan growth affected net interest income growth. On the other hand, asset quality performance was stable despite elevated slippage, largely led by Corporate – this includes slippage from SREI Infra (Rs 2,600 crore). However, higher write-offs and upgrades aided improvement in asset quality on a sequential basis. Moreover, it now carries provisions of 65% on SREI Infra (higher versus peers).

The SMA-2 book declined to 2.3% of loans (versus 3.7% of loans in first quarter of FY22). Thus, slippage would moderate from fiscal 2023 onwards, and credit costs are expected to come in at 2.2%/1.9% for FY22/FY23, according to analysts.

Punjab National Bank

Punjab National Bank (PNB) delivered a weak operating performance in the second quarter as the bank was impacted by a decline in net interest income with domestic margins contracting sharply by 36 basis points quarter on quarter, while net earnings grew 78% year on year, aided mainly by tax reversals. The total recovery from the DHFL resolution was Rs 1,270 crore and was predominantly utilised for making provisions for one large corporate account (SREI Infra). On the business front, loans/deposits grew 2% sequentially.

PNB reported a 78% YoY and 8% QoQ increase in PAT at Rs 1,110 crore aided mainly by tax reversals (Rs 340 crore) and controlled provisions (34% QoQ decline). However, PNB’s operating performance was weak with the PPoP declining 27% YoY due to a decline of 25% YoY in net interest income and domestic margins declining sharply by 36 bps QoQ to 2.45%.

On the asset quality front, slippages were elevated (~5.4% annualised) due to two large corporate accounts (Rs 3600 crore) which included slippage of Rs 2,800 crore from Srei Infra. However, higher recoveries and upgradations supported the bank’s asset quality with its GNPA/NNPA ratio declining by 70bp/35bp sequentially. PNB’s total restructured book (earlier Covid schemes) stood at 3.1% of loans, while total SMA overdue (Rs 5 crore) amounted to Rs 25,000 crore.

UCO Bank

UCO Bank’s net profit for July-September jumped 581.9% on year to Rs 210 crore on improvement in asset quality, lower overall provisions, and growth in other income. Sequentially, the net profit increased 101.7%. In the quarter ended September, provisions and contingencies excluding current tax, stood at Rs 1,020 crore, down 21.7% on year and largely unchanged on quarter. Provisions for tax were at Rs 100 crore, against a Rs 260 crore write-back last year. Provisions for non-performing assets stood at Rs 1,590 crore, up 54.6% on year and 88.9% on quarter.

The bank said it had identified two Kolkata-based accounts of the same group as non-performing assets during the quarter, post lifting of a legal stay on identifying them as bad loans. While UCO Bank didn’t name the account or group, it possibly referred to Srei Infrastructure Finance and Srei Equipment Finance.

The Srei twins are under the scanner after the Reserve Bank of India superseded their boards, citing corporate governance issues. UCO Bank said it had provided for these two stressed accounts as per regulatory norms. Despite this, UCO Bank’s gross non-performing asset ratio eased to 8.98% as on September 30 from 9.37% on Jun 30, and 11.62% a year ago.

The net non-performing asset ratio fell to 3.37% as on Sep 30 from 3.85% a quarter ago and 3.63% a year ago. The bank said that to guard against the impact of any future waves of Covid on its books, it was making an ad hoc provision of 2.5 bln rupees in July-September, taking the total provisions linked to Covid to Rs 750 crore as on September 30.



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Union Bank home loans at lowest ever 6.4% rate, BFSI News, ET BFSI

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Union Bank of India on Tuesday announced a reduction in its home loan interest rates, which will now start from 6.4% – the lowest rate in the industry. The reduced rate will be effective from October 27. The new rates will apply to customers applying for fresh loans or those who wish to transfer their existing loans including balance transfers. This is the lowest home loan rate offered by a mainstream bank ever.

“We are offering 6.4% for the best category of customers with credit scores of over 800. The low-cost deposits are providing us a cushion enabling us to cut rates even further,” said Rajkiran Rai, MD & CEO, Union Bank of India. He added that the bank was working with thin margins as defaults among top-rated customers is unlikely and also the RBI assigns a lower risk-weightage to home loans, which enables banks to lend more with less capital.

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Union Bank MD, BFSI News, ET BFSI

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MUMBAI: With digitization gaining pace, close to 50 per cent of retail and MSME loans offered by banks will shift to digital lending platforms over the next two to three years, Union Bank of India’s Managing Director and CEO Rajkiran Rai G said on Thursday.

Rai said digital lending is changing the banking landscape in a big way because of the availability of data and many ecosystem partners collaborating with banks.

“I feel that at least 50 per cent of the loans under retail and MSME segments will move to the digital lending platforms, right from sourcing to documentation level, in two to three years,” Rai said while speaking at the Sibos 2021, an annual banking and finance conference.

He said the digital lending space is gaining traction and banks need to develop products that can deliver services online to customers. Rai said he sees a big revolution in MSME lending going forward.

“The working capital lending to MSME will move from open credit like working capitals and cash credits, to very-targeted lending such as very specific invoice discounting and supply bill discounting,” he said.

Speaking about the entry of fintech in the banking space, he said initially it was thought that fintech will compete with banks, but now the relationship between the two has become more symbiotic.

“Now, fintechs are helping us (banks). They are no longer competitors to us. The digital lending space will be nothing but fintech tie-ups,” he said.

There are many products where fintechs are already working with banks, he added.

Rai believes banks need to continuously invest in technology and upgrade themselves.

He said the management bandwidth in the public sector space, at least on thinking about innovations and digitization, is quite less.

“We have the traditional people who are good in handling technology and managing the core banking system, but they are not in the space of innovation and developing new products,” Rai said.

He said public sector banks need to get new talent from the system who are adept in technology and can bring in innovations.



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Moody’s raises rating outlook to stable for 18 corporates, banks, BFSI News, ET BFSI

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Moody’s Investors Service on Wednesday raised the rating outlook for 18 Indian corporates and banks, including Reliance Industries, Infosys, SBI and Axis Bank, to ‘stable’ from ‘negative’. This follows the upgrade by the US-based rating agency in India’s sovereign rating outlook to ‘stable’ from ‘negative’ on Tuesday. The agency had affirmed the sovereign rating at ‘Baa3’.

The nine companies whose rating outlook has been revised upwards are RIL, TCS, Infosys, ONGC, Petronet LNG Ltd, UltraTech Cement, Oil India, Indian Oil Corporation and Hindustan Petroleum Corporation Ltd (HPCL).

The agency also affirmed the rating on privatisation-bound Bharat Petroleum Corporation (BPCL), but maintained the ‘negative’ outlook.

The nine banks whose outlook has been revised to ‘stable’ are SBI, Axis Bank, Bank of Baroda, Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, PNB, Union Bank and EXIM Bank.

“Stabilization in asset quality and improved capital are the main drivers of this rating action,” Moody’s said.

Also, the rating outlook has been revised to ‘stable’ from ‘negative’ on 10 Indian infrastructure issuers, including NTPC, NHAI, PGCIL, Gail, Adani Transmission and Adani Ports and Special Economic Zone Limited (APSEZ). PTI JD ABM ABM



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SBI, Union Bank, PNB pick up stake in NARCL, BFSI News, ET BFSI

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Three state-owned lenders — SBI, Union Bank of India and PNB — picked up over 12 per cent stake each in the proposed bad bank NARCL on Thursday, and said their holdings will be brought down by December. While State Bank of India (SBI) and Union Bank of India picked up 13.27 per cent stake each, representing a cumulative 3.88 crore shares in the National Asset Reconstruction Company Ltd (NARCL), PNB subscribed to 12.06 per cent stake (1,80,00,000 shares).

In a regulatory filing on the subscription to 1,98,00,000 shares of NARCL (pending execution of the investment agreement), the country’s largest lender SBI said the “investment of equity stake of 13.27 per cent by State Bank of India to be reduced to 9.90 per cent by 31st December 2021”.

Union Bank of India, in its regulatory filing, said it has subscribed to 1,98,00,000 shares of NARCL (pending execution of investment agreement).

The lender said it will bring down its stake of 13.27 per cent to 9.90 per cent by December 2021 on subscription by other public sector banks (PSBs)/ financial institutions.

“Punjab National Bank has subscribed to 1,80,00,000 shares of National Asset Reconstruction Company Ltd (pending execution of investment agreement),” the bank said in a separate filing.

PNB said it will bring down its stake from 12.06 per cent to 9 per cent by December 31, 2021.

NARCL, which is yet to become operational, will take over the bad assets of banks in its own account for speedy resolution of sour loans.

All the three lenders have subscribed to the equity in NARCL at Rs 10 per share. The completion of the acquisition by them is expected by March 2022.

Earlier this month, the Cabinet cleared a proposal to provide government guarantee worth Rs 31,000 crore to security receipts issued by the NARCL.

Incorporated on July 7, 2021, NARCL will pay up to 15 per cent of the agreed value for the bad loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

It will be 51 per cent owned by PSBs and the remaining by private sector lenders. State-owned Canara Bank has expressed its intent to be the lead sponsor of NARCL with a 12 per cent stake. PTI KPM ABM ABM



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BoI, Union Bank, PNB may gain most from bad bank, BFSI News, ET BFSI

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The National Asset Reconstruction Company (NARCL) will have maximum impact on loan books of Bank of India (BoI), Union Bank and Punjab National Bank (PNB), which will sell over 1% of their loans to the bad bank. According to rating agency Crisil, the bad bank, or NARCL, will lower the NPA level of banks by 20-25% over time.

However, the immediate impact on the bottom line will be limited as lenders who sell loans in the first phase will receive just around Rs 2,700 crore upfront cash payment as against the Rs 90,000 crore of bad loans they sell to the corporation. Also, investing in the security receipts issued by NARCL will not increase the capital requirement of banks due to the government guarantee.

Of the Rs 2 lakh crore of bad loans to be transferred to NARCL, around Rs 30,600 crore will be guaranteed for five years. NARCL will pay 15% of whatever amount the loans are valued at, in cash. The remaining 85% will be paid using security receipts. According to a Jefferies report, the government guarantee will keep the security capital neutral as without the guarantee banks will have to set aside funds towards provisions. A sovereign guarantee being risk-free does not attract similar capital requirements.

“For the guaranteed part, banks will recognise the value as an investment but that will not require any capital for 5 years as there is government guarantee. For non-guaranteed part, banks might not recognise value until actual recovery is made,” the Jefferies report said.

According to the report, of the first lot, SBI will be transferring the biggest chunk of loans at Rs 20,000 crore. However, given the size, the sale will be only 0.8% of its loan book. While BoI, Union Bank and PNB will be selling much less at Rs 5,500 crore, Rs 7,800 crore and Rs 8,000 crore, their loans will be a much bigger chunk of their balance sheet. For BoI, the loans sold will be 1.5% of its book, 1.3% for Union Bank and 1.2% for PNB, Jefferies said.

“The sovereign guarantee will cushion security receipt investors against potential lower recoveries. This could, in turn, potentially enable the development of a secondary market in security receipts, which has proved elusive so far,” said Crisil senior director and deputy chief ratings officer Krishnan Sitaraman.

The loans sold to the bad bank include Rs 22,500-crore exposure to Videocon Oil Ventures, where SBI is the lead bank. Another large account is Union Bank-led account of Amtek Auto, which has Rs 9,014 crore of bank loans. IDBI is the lead banker in three large accounts — Reliance Naval, Jaypee Infra and GTL.



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Govt extends tenure of 4 public sector banks’ top officials, BFSI News, ET BFSI

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Four state-owned banks on Friday said the government has extended tenures of their top officials, including managing director and chief executive officers (MD and CEOs) of Punjab National Bank and Bank of Maharashtra.

Besides, the government has extended the tenures of executive directors of Punjab National Bank (PNB), Union Bank of India and Central Bank of India.

The government sent notifications to these banks on Thursday, informing them about the extensions given to the top-level officials.

“The Department of Financial Services, Ministry of Finance, vide its notification dated August 26, 2021, has extended the term of office of S S Mallikarjuna Rao, managing director and chief executive officer of the bank (PNB), for a period beyond September 18, 2021,” PNB said in a regulatory filing.

Rao’s current tenure was to come to an end on September 18, 2021, and the extension has been given till the date of his superannuation (January 31, 2022) or until further orders, whichever is earlier, PNB said.

The government has also extended the tenure of Bank of Maharashtra MD and CEO A S Rajeev for two years, the Pune-based lender said in a filing.

Rajeev’s current tenure was coming to an end on December 1, 2021.

In addition to this, two executive directors of PNB, two in Union Bank of India (UBI) and one in Central Bank of India have been given extension beyond their current tenures.

Sanjay Kumar and Vijay Dube, executive directors of PNB, have been given extensions till August 23, 2023 and November 30, 2022, respectively.

The terms of UBI’s executive directors — Manas Ranjan Biswal and Gopal Singh Gusain — have been extended.

Biswal’s term has been extended beyond his currently notified term, which expires on February 28, 2022, till the date of his superannuation (April 30, 2022) or until further orders, whichever is earlier, Union Bank of India said.

Similarly, Gusain’s term has been extended till the date of his superannuation, (January 31, 2022) or until further orders, whichever is earlier. His term was coming to an end on September 19.

The Department of Financial Services, through a notification on August 26, has also extended the term of office of Ashok Srivastava, executive director of Central Bank of India, the lender said in a separate filing.

His term has been extended beyond January 22, 2022, till the date of his superannuation (November 30, 2022) or until further orders, whichever is earlier, Central Bank of India said.



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