Public sector banks are expected to raise Rs20,000 crore from additional tier-1 (AT-1) bonds in the current financial year to boost growth, ratings agency ICRA said in a report, adding that private banks’ issuance is likely to remain modest at Rs5,000 crore.
The bond issuances are likely to lower compared to an all-time high of Rs 42,800 crore in the previous year, which were driven due to refinancing as these bonds have a refinancing option after five year. While issuances were robust at Rs34,400 crore in FY18, banks had preponed the refinance of a major portion of the bonds in FY22 due to lower interest rates. Net of new offerings and redemptions between April and July 2022, the AT-I bonds outstanding on July 31, 2022, were Rs1.02 trillion.
“Public sector banks are expected to raise Rs20,100 crore in AT-1 bonds during FY23, but private sector issuances are expected to remain modest depending on market opportunities. Unlike in FY22, when issuances were mostly driven by rollover requirements, issuances by public banks in FY2023 are primarily driven by growth requirements,” Anil Gupta, vice-president at ICRA said in the report. The AT-1 bonds outstanding stood at Rs1.02 trillion as on July 31, and with the Rs20,000-crore bond issuances this year, total bonds outstanding will reach to Rs1.1 trillion, the report said. The banks’ improved financial performance will support their ability to raise funds.
Also read| Bank of Maharashtra raises Rs 290 crore via AT1 bonds
The yields on recently issued AT-1 bonds ranged from 8.0 to 8.75%, compared to 7.25% on a five-year government bond and 7.55% on a five-year AAA corporate bond. The coupon on the bonds issued recently is greater than the coupon on the bonds issued in FY22, but it is still lower than the rates on the bonds issued earlier in FY17 and FY18, the report said.
Also read| Bank of Baroda plans to raise up to Rs 1,000 cr via AT-1 bonds
Overseas issuances are likely to remain lower in FY23 due to elevated borrowing costs due to rapid increase in foreign currency benchmark rates, as well as tighter liquidity conditions globally, the ratings agency said. While private banks raised Rs12,800 crore through AT-1 bonds from overseas market in FY22, domestic AT-1 issuances picked up steam once PSU banks received permissions from the government in the second half of FY22.
Corporate treasuries, family offices, and high-net-worth individuals and some private banks were the investors in the PSU banks’ bond issues. “Following Covid-19, large private banks raised over Rs600 billion in equity capital during FY2021, and the prognosis for internal capital generation remains favourable for both private and public banks,” the report said.