Covid-19, which is likely to have significant impact on economy, has prompted banks to make pre-emptive provisions.
IDFC First Bank on May 6 said the bank decided to raise capital through a preferential issue to guard against the likely impact of novel coronavirus, or COVID-19, pandemic on its loan portfolio. Early in May, IDFC First bank had announced plans to raise Rs 2,000 crore through a preferential route from a clutch of investors including ICICI Prudential Life Insurance, HDFC Life Insurance, Bajaj Allianz Life Insurance, Dayside Investment (Warburg Pincus group), and IDFC.
Explaining the rationale of the preferential issue, the bank said, “COVID-19 has significantly impacted many businesses across the country. The exact impact of COVID 19 on our portfolio is bit uncertain and will only be seen over the next few quarters. By raising equity capital at this stage, we will enter the phase of COVID-19 impact on the economy from a position of strength.”
Besides this, the capital raised will also be used to support the growth plans, the bank said. Of the Rs 2,000 crore, Rs 800 crore will come from IDFC Financial Holding Company, Rs 600 crore from ICICI Prudential Life Insurance, Rs 200 crore from Dayside Investment (Warburg Pincus group), Rs 200 crore from HDFC Life Insurance and Rs 200 crore from Bajaj Allianz Life Insurance.
After the capital raising exercise, the revised book value per share will be Rs 30.40 compared to Rs 31.82 as on December 31, 2019. The capital adequacy will be 15.5 percent with the Common Equity Tier 1 (CET1) at 15.3 percent, the bank said. The bank's CET1 ratio stood at 13.28 percent as on December 31, 2019.
Currently, the bank is required to maintain a minimum total capital adequacy ratio (CAR) of 10.875 percent, of which minimum Tier 1 is 8.875 percent, including the capital conservation buffer. The bank’s total CAR as at December 31, 2019 was 13.3 percent, which comprised mainly of common equity capital.
“We would like to take our CET-1 (Common Equity Tier 1) capital adequacy to an even stronger level of more than 15 percent to have a fortress balance sheet,” said the bank.
IDFC First has a FAAA rating by CRISIL for its Rs 50,000 crore fixed deposit programme, which is the highest level of safety rating by the rating agency, but by raising this equity capital we will further strengthen our position, the bank said.
COVID-19, which is likely to have significant impact on economy, has prompted banks to make pre-emptive provisions. Axis Bank, for instance, has made an additional Rs 3,000 crore provisions in Q4 FY20 to cover likely losses on account of COVID-19. Analysts have taken these pre-emptive steps from banks as a sign of asset quality worsening going forward.