SBI prunes debut AT1 issue to $300 million

5.5% coupon rate to set benchmark for others

State Bank of India (SBI) on Wednesday said it had raised $300 million (about Rs 2,000 crore) through the country's first additional tier 1 (AT1) bond offering.

The size of the Basel-III compliant bond was pruned from $500 million.

As the bank wanted to test waters with this issue, it preferred to remain smaller size, said Anshula Kant, deputy managing director and chief financial officer, SBI.

It is expected to open up a new source of much-needed regulatory capital and provide a pricing benchmark for other banks keen to access the dollar AT1 market.

SBI fixed the coupon (interest rate) at 5.5 per cent, much better than pricing for AT1 bond offering by global banks, which carry higher credit rating. The price for this issue might become a benchmark for other Indian banks planning similar overseas bond offering.

SBIs Chairman Arundhati Bhattacharya said, "We are pleased to set a benchmark for US dollar AT1bonds by an Indian bank. This successful benchmark size deal opens the dollar AT1 market for Indian banks.

  Merchant bankers said while the best breed of investors, including private banking units put in money, they came with the small size.

They reduced commitment for the offering because of very fine pricing (5.5 per cent).

In fact, before the launch of the issue, bankers were looking at further reducing coupon close to five per cent.

The managers for bond offering include Citi, Standard Chartered Bank, JP Morgan, HSBC, and National Bank of Abu Dhabi.

SBI executives said the money raised through these perpetual bonds with a five-year call option will bolster capital adequacy of bank. The capital adequacy is expected to improve by 30 basis points.

SBI's capital adequacy ratio (CAR) was 14.01 per cent in June 2016, while it was 12 per cent a year ago. Out of 14.01 per cent, common equity tier-1 (CET-1) was 10.71 per cent in June 2016, while CAR was 12 per cent with CET-1 of 9.59 per cent a year ago.

It ratio improved substantially in the first quarter of FY17 due to gains from revaluation of real estate assets. It boosted CET-1 by Rs 14,383 crore (72 basis points).

Even prior to this issuance, SBI's CET1 was on an improving trend. This was because of a RBI ruling which allows banks to record a portion of revaluation reserves, deferred tax assets and foreign currency reserves as CET1 capital.

The government also announced infusion of Rs 7,570 crore in July. In addition, in September, banks raised Rs 2,100 crore by way of an AT1 issuance in the domestic market.

A key driver behind Indian banks' coming issuance of Basel-III compliant securities is the need to refinance their legacy capital securities (old style tier-1 and tier-II capital securities). These old bonds will be ineligible to be accounted towards regulatory capital from March 2019.