Weak demand for SBI perpetual bonds as investors seek higher returns

India's largest lender State Bank of India (SBI) raised only the base amount in its first perpetual bond issue for fiscal 2024 as investors sought higher returns than the bank was willing to offer, merchant bankers said.
 

SBI raised 31.01 billion rupees ($377.87 million) via the Basel III-compliant Tier-1 bond issue at a coupon of 8.10%. The issue had a base size of 30 billion rupees, with the option to retain another 70 billion rupees.

It received bids worth 59.20 billion rupees, with the highest bid at 8.42%, according to bankers.
 

"The investors expected a higher coupon than the secondary market trading levels and the cutoff was very low compared to the market's comfort," said Venkatakrishnan Srinivasan, founder and managing partner of debt advisory firm Rockfort Fincap.

Questions around the viability and pricing of perpetual bonds resurfaced after similar securities were written off as part of the rescue of Credit Suisse in March.
 

However, bankers attributed the weak demand for SBI's issue to the bonds' 10-year call option instead of the more common five years.
 

"The market priced this issue at a higher rate because, with the 10-year call option, the security becomes illiquid. So the investors wanted additional premium," said one of the merchant bankers, requesting anonymity as he is not authorised to speak to media.
 

"It was a clear case of misjudging market expectations." SBI did not reply to a Reuters email seeking comment.
 

Investors also demanded a better coupon as the supply of bonds from the federal and state governments is scheduled to rise in the current quarter.
 

States aim to raise 2.37 trillion rupees, while the centre is borrowing 4.47 trillion rupees.
 

Merchant bankers also said that many insurance companies were absent as they continue to await clarity on the classification of bonds from Housing Development Finance Corp (HDFC) after it merged into HDFC Bank.
 

If HDFC bonds are not allowed to be classified under the housing and infrastructure category, insurance companies will have to classify their entire exposure under the banking, financial services and insurance (BFSI) sector.
 

"Insurance companies do not want to fill up their BFSI limit when they also have the option to invest in other high-yielding papers," another banker said.