Bonds can help them even if these are only 5% of banks’ total liability.
Maybank Kim Eng reveals the two reasons why Thai banks are more active in bond issuance recently even if bonds are only 5% of their total liability: bonds enhance banks’ capital adequacy ratio (CAR) and are needed to fund outflow investment.
Here’s more from Maybank Kim Eng:
First, banks can count bonds as capital, thereby enhancing their CAR. Under BASEL III, banks are required to hold at least 10.3% CAR this year before the requirement rises to 11% next year. Furthermore, under the new accounting standard IFRS9, the way banks calculate their risk-weighted assets could be tightened, leading to lower CAR. Some banks also mention that the regulator may allow commercial banks to convert its equity to provision reserves in case they need extra provisions. Banks may need extra capital for that too.
Second, to fund outflow investment, banks need USD-denominated bonds as raising foreign currency deposit is difficult. We note that Thai corporate has been exploring opportunities outside Thailand, in light of relatively low return on domestic investment.
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