There was a lull in issuing additional tier-1 (AT-1) bonds in October and November, but banks are now showing renewed enthusiasm when it comes to raising capital through such instruments.
Public sector lenders lead the trend, outlining plans to tap debt capital markets by issuing AT-1 bonds. State Bank of India, the country’s largest lender, said on Wednesday its central board had approved plans to raise Rs 10,000 crore through fresh issuances of AT-1 bonds.
According to market sources, Bank of Maharashtra and Punjab National Bank are also likely to sell AT-1 bonds worth around Rs 1,000 crore each.
After issuing Rs 21, 034 crore worth of AT-1 bonds in July-September, banks stayed away from such debt issuances for two months as the bond market turned volatile.
However, with signs of easing inflation in the US and India driving down yields on government and corporate bonds since November, banks have shown renewed interest in issuing AT-1 bonds to raise long-term capital amid strong credit growth.
Yields on corporate bonds of three-to-ten year maturity have declined by around 9-14 basis points in the secondary market since October 31. A fall in bond yields makes it cheaper for banks to issue debt and raise funds.
Accounting for Bank of India’s AT-1 bond sale worth Rs 1,500 crore on December 1, public sector lenders have around Rs 13,500 crore worth of such debt sales lined up in coming weeks. That would take the issuance of AT-1 bonds for the whole year so far to Rs 34,534 crore. Banks had issued Rs 42,800 crore of AT-1 bonds in the previous year.
Accounting for Bank of India’s AT-1 bond sale worth Rs 1,500 crore on December 1, public sector lenders would end up issuing around Rs 13,500 crore worth of such bonds in coming weeks. That would take the issuance of AT-1 bonds for the whole year so far to Rs 34,534 crore. Banks had issued Rs 42,800 crore of AT-1 bonds in the previous year.
“On the AT-1 side, there are two things that are working out. One, is that the rates are fairly low even on AT-1 bonds. Two, banks are also shoring up their capital in anticipation of credit growth,” said Prakash Agarwal, Director & Head Financial Institutions, India Ratings & Research.
“PSU banks generally operate at a lower capitalisation level compared to private sector banks. Private sector banks front-load their capital-raising plans. I think the AT-1 bond issuances are partly on that account – they (PSU banks) are shoring up their capital buffers,” he said.
The capital-to-risk-weighted asset ratio (CRAR) of public sector banks as of March 2022 was 14.6 per cent. The regulatory requirement for CRAR is 10.87 per cent. The CRAR of private banks and foreign banks remained above 18 per cent, the RBI said in its Financial Stability Report, June 2022.
Additional tier-1 bonds are debt instruments issued by banks in order to shore up equity capital in accordance with the norms prescribed by the Basel Committee after the global financial crisis. These instruments are perpetual bonds, implying that while issuers provide periodic interest payments, there is no redemption of the principal amount.
The appeal for investors lies in the fact that the returns that AT-1 bonds fetch are typically higher than tier-2 bonds and fixed deposits. After investors suffered huge losses due to the write-down of Yes Bank’s AT-1 bonds in 2020, appetite for these instruments dwindled.
Analysts pointed out that a lion’s share of the AT-1 bond sales so far in the current financial year have been carried out by state-owned banks, as these lenders are considered to be safer entities due to perceived sovereign backing. Apart from HDFC Bank, no other private lender has issued AT-1 bonds so far in the current year.
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