The under pressure Standard Chartered Bank Botswana (SCBB) intends to raise capital through issuance of undated unsecured non cumulative subordinated debt to its parent company, the London based Standard Chartered Bank (SCB).
In the proposed deal, the Gaborone headquartered SCBB seeks the sum of P400 million in a form of bond issued to its major shareholder, with the debt financing having no maturity date for the return of principal, meaning that SCB will not redeem the principal but rather receive a fixed rate coupon interest payment continually until bought back. As it is a subordinated debt, it has claims after senior debt in case of defaults.
In a statement released Thursday by SCBB board of directors, the country’s oldest bank said as of 31 January 2018, the bank has P247.3 million of Tier 2 capital in issue in the form of subordinated notes issued under the company’s P500 million debt issuance programme. The bank also has subordinated debt in the total sum of P389 million owing to its largest shareholder being SCB.
“In order to continue to meet the minimum capital requirements of Bank of Botswana and to create a cushion against unexpected impairments caused by a difficult business environment SCBB intends to issue the Capital Securities in the total amount of BWP 400 million, which will comprise Additional Tier 1 Capital for the Bank, to SCB and utilise part of that capital to retire the BWP 247.26 million of Tier 2 Capital by exercise of SCBB’s right of redemption.”
Under the Basel Accord, a bank’s capital consists of tier 1 capital and tier 2 capital, and the two types of capital are different. Tier 1 capital is a bank’s core capital, whereas tier 2 capital is a bank’s supplementary capital. A bank’s total capital is calculated by adding its tier 1 and tier 2 capital together. Regulators use the capital ratio to determine and rank a bank’s capital adequacy.
Tier 1 capital is intended to measure a bank’s financial health and is used when a bank must absorb losses without ceasing business operations. Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves. Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital.
The Bank in the past three years has found itself in a precarious situation, reporting mounting losses, saddled by huge impairments mainly due to massive loans made to the mining sector. The bank suffered its biggest hit from an exposure to one company that has now exited the diamond and jewellery sector after its business folded. SCBB has also had to contend with a sharp decline in market liquidity and persistent low interest rates which impacted the bank’s top line.
The 121 years bank in its 2017 annual report said it faced significant challenges from within a stretched banking environment, citing subdued top line growth and increased costs as factors that slowed the bank’s growth. The bank’s declining performance has also dampened investor enthusiasm for its quoted stock on the Botswana Stock exchange, plummeting as much as 73 percent in the last two years.
“The transaction will benefit SCBB by ensuring an adequate capital position for the bank and provide it with the ability to support asset growth in line with its strategic agenda. This will assist SCBB to carry out its normal business activities effectively and without possible impediments, which will enhance the performance and soundness of the organisation for the future benefit of its shareholders,” read part of the statement from the board.
SCBB has since called an Extraordinary General Meeting of Shareholders of the company slated for the 28th August where shareholders are expected to consider and vote on the proposed issuance of capital securities.