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Union Bank likely to sell Rs 780 cr of AT-1 bonds as lenders seek capital

Lenders, particularly state-owned, turn to debt capital markets to finance hefty demand for loans

Union Bank of India
Treasury officials cited a recent fall in corporate bond yields as a key factor for rekindling the interest in AT-1 bonds.
Bhaskar Dutta Mumbai
3 min read Last Updated : Dec 19 2022 | 7:37 PM IST
State-owned Union Bank of India is likely to tap debt capital markets by issuing additional tier-1 (AT-1) bonds to raise up to Rs 780 crore, sources told Business Standard.

Bidding for Union Bank’s AT-1 bonds will likely be on December 21, sources said, adding that the base size of the debt sale was Rs 200 crore with a greenshoe option of Rs 580 crore.

With credit growth continuing to outstrip deposit growth, banks have turned to debt capital markets over the last few months in order to finance the hefty demand for loans.

State-owned banks have shown renewed interest in the issuance of AT-1 bonds in December after pausing for two months. Bank of India, Punjab National Bank, Bank of Maharashtra and the country’s largest lender, State Bank of India, have outlined plans to raise funds through AT-1 bonds in December.

Total issuance planned since December is just a little above Rs 14,000 crore. This would take the total issuance of AT-1 bonds this year to just a little above Rs 35,000 crore, treasury officials said. In the previous financial year, banks have raised around Rs 42,800 crore worth of AT-1 bonds.

Treasury officials cited a recent fall in corporate bond yields as a key factor for rekindling the interest in AT-1 bonds. Lower bond yields make it cheaper for banks to issue debt. Analysts also pointed out that public sector banks could be looking to shore up capital amid the heavy credit offtake. PSU banks typically have lower capital buffers than their private sector counterparts.

Latest data from the Reserve Bank of India (RBI) showed that as on December 2, bank credit growth was at 17.5 per cent while deposit growth lagged far behind at 9.9 per cent.

Additional tier-1 bonds are debt instruments issued by banks in order to shore up equity capital. 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.

The majority 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.

Topics :Union Bank of IndiaAdditional Tier 1 bondFundraising

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