Banks go slow on bond sales as rising interest rates push up costs

Banks looking to raise capital via bond sales to fund decade-high credit growth were compelled to put some of these debt issuances on hold amid a sharp rise in yields since late September, sources told Business Standard.

A major private lender, Axis Bank, has not yet followed through with a planned issuance of infrastructure bonds worth around Rs 3,000 crore. This is because volatility in the bond market in late September led to investors seeking higher yields, sources said.

Bank issuances of additional tier-1 bonds also came to a grinding halt in October as the rates being demanded by investors turned out to be much higher than the previous three months, the sources said.

The decision to go slow on these fund-raising plans — despite the booming credit growth — came at a time when bond market conditions turned turbulent.

After falling to a six-month low of 7.08 per cent on September 8, yield on the 10-year benchmark government bond jumped 32 basis points (bps) within just three weeks to end the month at 7.40 per cent.

While bond yields eased on Friday — the 10-year yield settled at 7.31 per cent. This is still much higher than the low seen in September.

Also, the outlook is uncertain amid the Reserve Bank of India’s (RBI’s) policy tightening cycle and the lack of inclusion in a global index. The RBI has raised the repo rate by 190 bps since May and more rate hikes are expected.

Sovereign bond yields are the benchmarks for pricing debt issued by corporations.

“Axis Bank was looking to raise infrastructure bonds. It had already got the ratings done for the infra bonds for around Rs 3,000 crore. Normally, these are of around seven-year maturity,” a source said.

“The announcements were initially made around September 20. Typically, once these plans are known, these issues get done within a week or two at best because the banks speak to investors from before. They have not cancelled the plans, they are holding back on them. The ratings are now in place. Whenever they are comfortable with the yields, they could hit the market very quickly,” the source said.

An email sent to Axis Bank did not receive any response.

In August and early September, two large banks – ICICI Bank and Bank of Baroda — had announced plans to sell infrastructure bonds.

The environment of rising interest rates has not only prompted banks to tread with caution on infra bonds but also on the issuance of AT-1 bonds. The AT bonds were a favourite fund-raising tool for banks during July-September.

After a flurry of AT-1 issuances in the previous three months, banks have ceased issuing AT-1 bonds from October onwards.

“I think it’s more to do with the turn in the interest rate cycle and not so much about the appetite. Banks would look to raise more, given the credit growth.

In fact, some banks were already lined up and then the yields shot up from 7.1 per cent to 7.3 per cent in a very short span of time,” Karan Gupta, director of financial institutions, India Ratings and Research, said.

“PSBs (public sector banks) still seem to have a fair amount of appetite for AT1 bonds as some of this is also being driven by replacement demand — to replace earlier bonds that have completed five years.

Punjab National Bank (PNB) has obtained Rs 12,000 crore board approval. Of that, Rs 5,500 crore was for AT-1. From this, it had only done close to Rs 2,658 crore. There is still a fair amount of appetite remaining,” he said.

During July-September, banks raised a total of Rs 24,034 crore through the issuance of AT-1 bonds, data provided by market sources showed.

The last such issuance was on September 19 by PNB, with the lender raising Rs 658 crore. In the previous financial year, banks had issued AT-1 bonds worth Rs 42,800 crore.

The rates that banks have paid to raise funds through AT-1 bonds have also swung wildly, reflecting the volatility in the sovereign bond market. It also indicates the premium demanded by investors based on the risk perception surrounding the issuing entity.

At present, Bank of India (BoI), is the only lender to have announced plans to issue AT-1 bonds. The bank said it plans an issuance of up to Rs 2,500 crore. With State Bank of India’s tier-1 bonds being offered for around 8.05 per cent, BoI’s AT-1 cut-off is likely to be much higher, dealers said.

With banks being well capitalised, they would prefer to adopt a wait-and-watch approach to AT-1, Gupta said. He added that any decline in yields could drive lenders back to the bond market promptly.