FIDF decree forces focus on subordinated bonds
Two major banks have announced their plans to raise funds through subordinated bonds, with the possible hike in deposit surcharges being highlighted as a reason.
Following Kasikornbank’s announcement to issue sub debts worth Bt22 billion, Siam Commercial Bank followed suit with the plan to raise Bt20 billion. Krung Thai Bank would also raise Bt30 billion through an unsecured, unsubordinated shortterm debenture programme.
“Banks need huge funds to finance new loans, but to mobilise funds through deposits, they risk a lower net interest margin,” said a source in the financial market.
He reasoned that with higher deposits, commercial banks would need to contribute a higher sum to the authorities following the executive decree to tackle the Financial Institutions Development Fund’s debt.
Commercial banks now contribute 0.4 per cent of deposits to the Deposit Protection Agency. Under the widely-criticised decree, the Bank of Thailand will assume the debt burden and it is empowered to levy additional charges. It is also likely that the deposit base would be enlarged to count bills of exchange.
Fitch Ratings (Thailand) rated SCB’s 10-year issue at “AA”. The Thai third-largest bank now controls a 16 per cent market share of loans and deposits at end-2011.
KTB’s short-term debenture programme is rated “AA+”. It plans to issue several tranches of debentures with a maturity of no more than 270 days, within 12 months of filing of documents. KTB is Thailand's second-largest bank with about 17 per cent market share in assets as of end-December 2011.
Thai Bond Market Association Executive Vice President Ariya Tiranaprakij told Krungthep Turakij that there are reasons to explain why large-sized banks are mobilising funds through bonds. First, they need to build up liquidity from other sources of fund beyond deposits, as in August deposits could flow to smaller banks as the maximum guarantee of each deposit account would be lowered to Bt1 million.
Second, bill of exchange is no longer a cheap fund-raising approach, as the Securities and Exchange Commission is slapping fees on the issuance. They also need permission for such issuance.
Bonds, though carrying a higher cost of fund compared to deposit costs, are not counted as deposit. As such, banks do not need to pay surcharges upon bonds to the Deposit Protection Agency.
She admitted that huge bond issuance by banks could raise the cost of funds for other corporates, particularly property developers, which need to offer a higher return.
