LEADING Thai banks were advised yesterday to raise fresh equity during this time of buoyant market sentiment to pay off their high-cost funding through a hybrid of bonds and equity known as Slips or Caps.

Donaldson Hartman, a banking analyst at Salomon Smith Barney, said although Bangkok Bank or Thai Farmers Bank may not need to raise new capital to fulfill capital-adequacy requirements, they should rather do away with the high-cost Caps or Slips.

The big banks such as Bangkok Bank, Thai Farmers, Bank of Ayudhya and Thai Military to the smaller DBS Thai Danu have avoided the tough choice of raising equity for fear of a dilution in shareholding and have instead resorted to issuing a combination of preferred stocks and subordinated debts to raise capital.

Although the Capital Augmented Preferred Shares (Caps) or Staple Limited Interest Preferred Shares (Slips) have helped the banks to weather the banking crisis without losing ownership control, the instruments have become a high cost for the banks, given the further downward pressure on interest rates. The banks' average cost in issuing Caps or Slips is 11 per cent.

''If I were their adviser, I would recommend them to raise equity now to pay off the Slips or Caps,'' Hartman said.

Against the initial wish of Tarrin Nimmanahaeminda, the finance minister, who would like the under-capitalised banks to tap tier-1 capital support from the Aug 14 Banking Restructuring Programme, Thai Farmers Bank started off by issuing Slips for Bt40 billion, followed by Bangkok Bank's Caps of Bt46 billion, Bank of Ayudhya's Caps of Bt26 billion, Thai Military Bank's super Caps of Bt12 billion, and DBS Thai Danu Bank's Slips of Bt6.6 billion.

These banks narrowly escaped nationalisation. On the contrary, Siam Commercial Bank, which a market source said almost decided to go for Slips, took a tough decision by tapping the tier-1 capital support programme and doing a global offering to raise Bt60 billion.

The spectacular success of Siam Commercial Bank has opened the way for other banks to raise equity if they wish now. As early as this year, the equity market appeared to be closed to Thai banks wishing to raise new capital.

Hartman is upbeat about the prospects of the Thai banking industry, which is gradually climbing off the bottom.

He said non-performing loans have started to come down at about 1 per cent a month this year as the low interest-rate environment has improved the prospects of corporate solvency and debt restructuring.

The framework put in place by the government to settle bankruptcy and corporate restructuring is likely to work and will bear fruit over the coming months, he added.

Moody's Investor Services and Standard & Poor's, the two US credit-rating agencies, have cited banking restructuring and recapitalisation, corporate-sector reform and external-account stability as the three key areas that they would like to see further progress before they upgrade Thailand's sovereign rating to investment grade.

Stephen Taran, managing director and global head of sovereign risk research at Salomon Smith Barney, said the rating agencies still view the big Thai banks as not doing enough recapitalisation and restructuring to warrant an upgrade.

But he believes that the Thai banks should be able to complete their recapitalisation by the third or fourth quarter of this year.

BY THANONG KHANTHONG