Regulator approves City Bank bond with convertible feature

The Bangladesh Bank has approved the issuance of the Tk400 crore perpetual bond of City Bank with convertible features.

The Bangladesh Securities and Exchange Commission (BSEC) endorsed the approval, stated the Dhaka Stock Exchange (DSE) website on Tuesday.

Earlier in June, the securities regulator gave approval to City Bank to issue the perpetual bond to enable the bank to boost its additional tier-1 capital.

Initially, the unsecured, floating rated bond was approved to be a non-convertible one, i.e., units of the bond could not be converted into City Bank shares.

But the central bank has approved the bond as convertible if the total common equity of City Bank falls short against its total risk weighted assets, thereby helping the bank comply with Basel III capital adequacy requirements.

In its disclosure on Tuesday, City Bank said that the issuance of the bond with convertible features will need to be green lit by the shareholders at the upcoming Extraordinary General Meeting (EGM) scheduled for November 17, 2020.

Basel III requires each bank to maintain total tier-1 capital of at least 8.5% of their risk weighted assets. Of the 8.5%, 4.5% must be capital from common shares, 1.5% from equity or debts with perpetual nature, and 2.5% must be the bank's buffer capital.

Bangladesh Bank approved the issuance of the bond with conversion features if the common equity tier-1 capital of City Bank goes below the 4.5% threshold and remains so for three consecutive quarters.

At the end of the third quarter, the bank has to convert a portion of its perpetual bond units into common shares following a weighted average secondary market pricing model for share valuation.

How much of the perpetual debt will be converted into common equity will be based on the number of shares the bank needs to make its common equity tier-1 capital at least 4.5%.

Until conversion, the perpetual bonds would only beef up additional tier-1 capital of the bank.

Bangladeshi banks, in a bid to comply with Basel III, are embracing perpetual bonds this year, instead of their decades-long love for subordinated bonds, which help them with tier-2 capital.

BSEC has received more than a dozen applications from commercial banks for perpetual bonds and they are granting consent following a period of scrutiny. Banks also need approval from the central bank for the issuance of bonds.

To popularize the secondary market for bonds in stock exchanges, the BSEC has already made it mandatory for all banks' perpetual bonds to be listed in the bourses.

Experts believe that the listing will also help attract a diversified investor base, rather than the ongoing concentration of bond subscribers within the banking industry that creates a systematic risk for the banking system.