Rule 'blocks funds for overseas deals'

Call for limit on tier-1 capital to be relaxed for some big MAs

The Bank of Thailand has been urged to revise the rule that prohibits banks from lending more than 25 per cent of their Tier 1 capital to a single client.

The single lending limit makes it difficult for banks to support large loans to big corporate customers to fund overseas expansion, including mergers and acquisitions (MA), said an executive banker who asked for anonymity.

The central bank should amend the definition of borrowing by business units of consolidated groups to pave the way for lending in such circumstances, he said.

"Matured growth at home means Thai corporates must expand overseas, and they want Thai banks to support their activities abroad. But we cannot because of the single lending limit. The growth of Thai corporates has surpassed the growth of local commercial banks, so if Thai banks cannot support them, the banks will be unable to grow in the next four to five years," he said.

When expanding overseas, many Thai companies are engaged in high-value MAs. For example, Thai Beverage spent more than US$2.2 billion (Bt67 billion) for a 22-per-cent stake in Singapore-listed Fraser and Neave. The takeover of London-listed Cove Energy cost PTT Exploration and Production about $1.9 billion.

The banker raised an interesting example illustrating the barriers imposed by the single lending limit. CP Group needed hundreds of billions of baht to buy a 15-per-cent stake in Ping An Insurance in China for the equivalent of Bt291 billion. But under the single lending rule, a Thai bank with only Bt200 billion in Tier 1 capital can lend only Bt50 billion.

Loan syndication from many banks might not be even enough for deals like this as Thai banks have to maintain their Tier 1 capital ratio to meet the requirements of Basel III.

At present, Bangkok Bank has the highest Tier 1 capital, worth Bt204.01 billion. Tier 1 capital consists primarily of common stock, retained earnings, and non-redeemable non-cumulative preferred stock.

The banker said that while the bond market played a more significant role in fund mobilisation for corporations, bank loans remained essential for MA deals that need quick financing.

When Thai banks cannot respond to such instant demand, big companies have to go to foreign banks or seek syndicated loans from many banks instead, which are often inflexible.

Kittiya Todhanakasem, first senior executive vice president, Krungthai Bank, said it planned to ask the central bank to relax the single lending limit on a case-by-case basis and under some conditions.

The commercial banks want the rule relaxed because the European debt crisis and uncertainty over the US economy are opportunities for Thai blue-chip companies to acquire businesses overseas.

The ability of banks in the European Union and the United States to participate might be low because they want to avoid taking more risks. Therefore, the relaxation of the rule would help Thai banks participate in such lending, she said.

"We understand that the rule is part of risk management. However, big corporates have measures to diversify risks," she said.

Thai banks have to adjust their strategies in case the BOT refuses to relax the rule, shifting focus towards raising funds through the capital market, Kittiya said. Nevertheless, the volume of bond issuance by big corporates has not grown, so fee income from the capital market has not widened much.

Piti Tantakasem, chief of wholesale banking for TMB Bank, supported the single lending limit, to reduce risks from loan concentration.

Conglomerates such as PTT and Siam Cement Group can raise funds from many sources apart from bank loans, he noted.

"The banks should adjust to the rule. We think Thai banks can keep their funds for serving corporate activities at home if they cannot lend huge amounts for offshore activities," he said.

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Article source: http://www.thethailandlinks.com/2013/01/14/rule-blocks-funds-for-overseas-deals/