IFIC Bank Limited wants to issue a Tk1,000 crore perpetual bond to strengthen its risk-based capital adequacy.
The proceeds of the bond will be regarded as Additional Tier-1 capital of the issuer, which will help the private sector lender fulfill its Basel III requirement set by the central bank.
The board of directors of the bank made this decision at a recent meeting, according to the Dhaka Stock Exchange (DSE).
It will issue the bond on a private placement basis for Tk900 crore and on a public offer basis for Tk100 crore, subject to the regulatory and shareholders' approval.
The bank has fixed 26 August for an extraordinary general meeting (EGM) for shareholders' approval. The record date for the EGM will be 13 July.
The bank had earlier decided to issue a subordinated bond worth Tk500 crore for Tier-2 capital, which is awaiting the regulator's approval.
In 2019, the bank had planned to raise the capital by issuing the right shares to the shareholders but the securities regulator rejected the lender's application as it had failed to appoint underwriters.
A senior officer at the bank, seeking anonymity, said the lender will invest heavily in several sectors over the next five years.
He said bad debts were likely to increase due to the Covid-19 pandemic impacts, which would reduce the capital adequacy ratio (CAR) of the lender.
"That is why we are strengthening capital by issuing bonds as per the Basel III requirement. This is because our lending or investment capacity will reduce if the CAR goes down," he explained.
The official said the Bangladesh Bank had fixed the interest rate on bonds at 6-10%.
"Although this rate is higher than that of the deposits, it will not create much problem for us," he added.
A senior merchant banker said a bond is known as a risk-free investment tool for investors. But investors will examine the credit rating result of the bond issuer before making an investment.
He further said credit rating indicates the issuer's financial health and also determines the corporate governance.
IFIC Bank's credit rating is "AA" for the long-term and "ST-2" for the short-term based on audited financial statement of the bank up to 31 December 2019, according to the Emerging Credit Rating Limited (ECRL).
The bank has paid a 5% stock dividend to the shareholders for the financial year 2020 that ended on 31 December.
In that year, its net profit decreased by 63% to Tk113.30 crore due to the Covid-19 pandemic, according to the bank's financial statement.
In this year, eleven private commercial banks announced to raise Tk6,100 crore by issuing perpetual and subordinated bonds – two financial instruments that are becoming popular in the banking sector – to strengthen their risk-weighted capital base.
The lenders are AB Bank, Bank Asia, Dhaka Bank, Islami Bank, Mercantile Bank, Pubali Bank, Shahjalal Islami Bank, IFIC Bank, Jamuna Bank, NCC Bank, and NRBC Bank.
According to Basel III regulations, banks were supposed to maintain a minimum CAR of 12.5% by 2019. The CAR is used to protect depositors.
The industry's average CAR stood at 11.64% at the end of December last year, according to the data available with the Bangladesh Bank.
Moreover, in the new dividend policy, banks are required to maintain at least 15% CAR to announce the highest 30% dividends.
Only 12 banks had maintained 15% CAR until December last year. Some of them are likely to drop from the level as default loans have been assumed to rise significantly this year because of the post-pandemic effects, say industry insiders.
The BSEC in July last year decided that all perpetual bonds must be tradable on the main boards of local bourses.
Later in March this year, the Bangladesh Bank and the BSEC at a meeting decided that perpetual bonds issued must be listed on the stock exchanges within 30 days of their subscription closure.
In May, the BSEC decided that the issuers of perpetual bonds must float 10% of the bond units through public offerings.
Emranul Huq, managing director of Dhaka Bank, said perpetual bonds cannot be liquidated before 10 years. "Moreover, many investors choose this as it is risk-free. It will be better for us if bond transactions begin," he added.