Banks tier II bond issuance surges 3.5 times in FY23, shows data

The tier II bond issuances by commercial banks rose 3.5 times Year-on-Year (YoY) basis to over Rs 59,600 crore in Fy23. Country’s largest private sector lender HDFC Bank led the pack by raising Rs 20,000 crore through the instrument.

Country’s largest bank State Bank of India issued tier II bonds worth Rs 13,718 crore, followed by another large private lender Axis Bank with 12,000 crore, according to JM Financial Services group data.

The issuance of tier II as well as tier I bonds was marked by increase in the coupon on instruments reflecting hardening of interest rates and tight liquidity. This was an outcome of the Reserve Bank of India’s monetary policy stance, Bond dealers and analysts said.

 

The tier II bonds are cheaper than additional tier I bonds (AT1) in terms of coupon. The coupon is around 100 basis points lower for tier II bonds than AT1 instruments. Another aspect is demand for such instruments. Those with lower ratings find it difficult to place AT1 bonds, they added. 

The rated Basel III compliant tier I and tier II instruments are hybrid subordinated debt instruments with equity-like loss-absorption features. Such features may translate into higher loss severity vis-à-vis conventional debt instruments.

Bond dealers said the activity on AT 1 bonds front was subdued. Banks issued bonds worth over Rs 34,000 crore in Fy23 as against around Rs 29,600 crore in Fy22.

Among public sector lenders, seven were active issuers of AT1 bonds and only one private bank issued AT1 bonds in Fy23.

SBI raised the largest amount at Rs 15,133 crore in various tranches, followed by Punjab National Bank at Rs 4,214 crore and Canara Bank at Rs 4,000 crore. HDFC Bank raised Rs 4,000 crore in capital via AT1 bonds.

The quantum of funds raised through infrastructure bonds declined Rs 19,900 crore in Fy23 from about Rs 27,200 crore in Fy22. Banks which were prominent in using infrastructure bonds were SBI at Rs 10,000 crore and ICICI Bank at Rs 7,100 crore.

Infrastructure bonds need to have at least seven-year maturity. Some banks weighed relative costs for them with deposits with similar maturity. They opted to use the infra bond route to raise money as rate of interest was relatively lower than deposits with similar maturity.

Banks have faced intense competition to mobilise resources for meeting credit demand especially in the busy season spanning over October 2022 to March 2023.