South Indian Bank’s Tier-ii bond move won’t disrupt sector: Fitch

South Indian Bank’s recent decision to not redeem its tier2 bonds before maturity is unlikely to have significant long-term market implications for the banking sector, Fitch Ratings said on Monday.

“We believe the action is bank-specific and not necessarily representative of the broader market, given the associated reputational risk,” Fitch said.

On November 25, reports quoted a spokesperson from South Indian Bank saying that the lender had chosen to not exercise a five-year call option on tier-2 bonds due at the end of the previous month. A call option refers to the choice that a bank has to redeem a bond before its maturity.

Chithra H, South Indian Bank’s chief financial officer, in an email to Business Standard said on Monday the decision on the call option was based on the lender’s business priorities at that point of time.

There have been occasions when the decision of a bank to refrain from exercising a call option on a bond has been interpreted as an indicator of a weak capital position. According to Fitch, South Indian Bank’s decision, however, does not indicate any weakness in capital position.

“Banks can also choose to exercise a call if they can demonstrate capitalisation well above regulatory requirements after the call is exercised, but we do not think this was the reason for SIB’S decision,” said the rating agency.

“This is because the bank reported a common equity tier 1 ratio of 12.3 per cent and a total capital ratio of 16.0 per cent for the first half of FY23, against minimum requirements of 8.0 per cent and 9.0 per cent, respectively, and we estimate that the affected debt is only 1.1 per cent of riskweighted assets,” Fitch said.