Banks expected to speed up launches of Tier 2 instruments

Commercial banks are expected to speed up the launch of additional Tier 2 capital instruments after the Securities and Exchange Commission loosened regulations to allowing banks to offer such instrument to retail investors. Previously they could be offered only to institutional investors and wealthy clients.

SEC secretary-general Vorapol Socatiyanurak said yesterday that the Capital Market Supervisory Board recently approved regulations to allow the sale of commercial banks’ Basel III additional Tier 2 instruments to retail investors. Mutual funds, excluding money-market funds, will also be permitted to invest in such instruments offered domestically or overseas, to the extent specified by investment limits. 

The regulations aim to widen both channels for banks to strengthen their capital and investors’ investment choices.

In addition, the floor conversion price of Basel III additional Tier 2 instruments has been set at 50 per cent of the commercial banks’ common stock prices at the offering period. 

The floor conversion price will also be applicable to Basel III additional Tier 1 instruments with a condition of conversion to equity. 

The commercial banks must file registration statements and clearly disclose the features of the instruments, while intermediaries and sales agents must have in place procedures to ensure their clients understand the associated risks and expected returns before making their investment decisions.

“The complexity and associated risks of Basel III additional Tier 2 instruments are different from those of plain debt securities because the holders will be forced to convert them into common shares if the banks face financial problems,” Vorapol said. 

“In addition, banks will be able to determine the number of shares for conversion prior to the offering of instruments. In order to provide investors with sufficient information, moreover, intermediaries and sales agents must apply procedures for selling high-risk securities such as suitability tests, key information disclosure and warning of the securities’ high risks or complexity.” 

Previously, some commercial banks offered additional Tier 2 instruments to institutional investors overseas and local wealthy customers with assets under management of at least Bt10 million, in conformance with a regulation of the SEC to comply with the Third Basel Accord.

Krungthai Bank is only Thai bank that offered subordinated debentures in the offshore market to top up its Tier 2 capital. 

The issue worth US$700 million was made in July. In the same month, Thanachart Bank offered an additional Tier 2 instrument worth up to Bt13 billion to the bank’s high-net-worth customers.

From August 22-28, TMB Bank offered an additional Tier 2 instrument worth up to Bt15 billion to institution investors.

Kasikornbank recently notified the SEC of its intention to sell hybrid Tier 2 instruments to its high-net-worth customers and local institutional investors.

Anuwat Luengtaweekul, executive vice president and chief financial officer of Thanachart Bank, said the new rule would support the market a lot, and the banks would be active in offering these instruments. 

The bank might consider offering additional instruments, but it has to consider the pricing as well.

Fitch Ratings has suggested that Thai banks will need to issue significant amounts of Basel III Tier 2 instruments to replenish their capital.