State Bank of India (SBI) plans to raise Rs 10 bn through a tier-II bond issue at a yield of 11% in March'2000. SBI's main reason of doing so is to raise funds to meet its capital adequacy requirements.
SBI (FY99 total income: Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.
SBI has planned to wait until March to raise these funds as it wants to take advantage of any likely reduction in interest rates announced in the budget. SBI plans to place the 63 month subordinated debt at a return of 50 basis points above the yield on government. As blue chip corporates are looking to raise funds 75 basis points above the sovereign yield, SBI with its strong fundamentals and financial strength should be able to raise funds at 50 basis points above the yield on government securities.
As this will take care of SBI's funding needs only temporarily, it is estimated that SBI will need to raise Rs 30 bn in the next three years to maintain its capital adequacy level at 12%. Also SBI will be in a position to raise funds from the market only if the government permits the Reserve Bank of India to reduce its stake in SBI to less than 50%. This would be necessary as it is expected that the government due to budgetary constraints will not be able to fund additional equity into State Bank of India.
This bond issue of SBI will go through at 11% yield due to its strong balance sheet position and hence safety for investors as it is India's long term play on banking sector. Also raising funds at such a low cost will help it maintain its spreads.
The improving economic scenario and the steps taken by SBI to counter its inefficiencies has made many analysts turn positive on the stock.
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