Any dent unlikely in AT-1 bond demand in India

Punjab National Bank (PNB) is expected to raise Rs 2,000 crore worth of AT-1 bonds on Friday at coupon of 8.50%. The bonds are rated “AA+” by India Ratings, and “AA” by CARE Ratings.

AT-1 bonds, conundrum
AT-1 bonds have their roots in the global financial crisis of 2007-08 wherein the governments’ bailing out of many banks using taxpayers’ money came under heavy public criticism.

Banks in India are going ahead with issuances of additional tier 1 (AT-1) bonds even as concerns about these instruments have increased globally after regulators wrote off $17 billion of Credit Suisse’s AT-1 bonds.

However, the cost of issuance could go up for some. Ritesh Bhusari, DGM, treasury, South Indian Bank, said following the global and local events, private banks might find it a little harder to raise AT-1 bonds and that the cost for them will go up. “Large private banks’ issuances will be impacted marginally while costs for small private banks will possibly go up a bit more,”Bhusari said.

Punjab National Bank (PNB) is expected to raise Rs 2,000 crore worth of AT-1 bonds on Friday at coupon of 8.50%. The bonds are rated “AA+” by India Ratings, and “AA” by CARE Ratings. This would be the first issue of AT-I bonds by a large bank after the crisis at Credit Suisse unfolded.

A senior treasury official at PNB said there was no connection between events at Credit Suisse and PNB. “Since it is a Basel-compliant bond and has a loss-absorbing feature, on paper there can be a loss,” he said, but pointed out it was highly unlikely that “the government would allow PNB to fail in five years”.

Experts believe demand for these bonds would be good given they are being issued by strong lenders and returns are attractive. AT-1 bonds are perpetual in nature and have a call option after five years. Since these bonds have a 100-year maturity period, they are called perpetual in nature.

So far in FY23, Indian banks have raised Rs 33,420 crore via AT-1 bonds, with public sector lenders raising 91% of the total quantum, as per Bloomberg data.

UCO Bank has raised Rs 500 crore at 9.50% coupon rate while State Bank of India (SBI) raised Rs 3,717 crore at a coupon of 8.25% earlier this month. In February, SBI raised a tranche of Rs 4,544 crore at a coupon of 8.20%, the data showed. In FY22, Indian banks had raised a record Rs 41,569 crore through AT-1 bonds, sharply higher than Rs 18,723 crore raised during the previous fiscal.

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap, a fixed-income advisory firm, observed that while there is global concern, we already have one such instance with YES Bank’s AT-1 Bonds being written off.
In the Yes Bank case, bondholders have gone to court over the matter.
Srinivasan observed that some banks may have postponed their borrowings after the YES Bank case. “However, with a lender like SBI which has the most credibility and highest credit rating coming forward to issue bonds at the right price, the markets picked those up. All other top-rated banks have followed SBI now that the market has stabilised,” he added.

Jindal Haria, associate director at India Ratings & Research, noted that any impact from the Credit Suisse AT-1 bond write down would be transitory in nature or investor-specific. There would be no broad-based and long-lasting impact because of the global event, Haria said. “Indian banks are in a reasonably healthy position and from a performance point of view, best placed in decades, even the public sector ones. So they will be able to retain their ability to raise tier-I capital.”

The quantum of fundraise through AT-1 bonds, he feels, will depend on the exercise of call options on existing AT-1 bonds at their due dates, banks’ credit growth trajectory, performance of equity raising and supply of funds to potential investors.

Aditya Gore, head of international coverage & research at Nuvama Fixed Income Advisory, said since the YES Bank case, the bond market has clearly differentiated between high quality and marginal issuers of AT-1 bonds. “The high-quality ones have witnessed good demand over the years, while the marginal ones have not been able to access the market easily. We see the yields of high-quality issuer AT-1 bonds unaffected by the recent global event. There are hardly any marginal issuers of AT-1 bonds, outstanding and liquid, so we do not see any meaningful impact there as well.”

During FY23, HDFC Bank was the only private sector lender who raised funds amounting to Rs 3,000 crore via AT-I bonds in September, at a coupon rate of 7.84%, data showed. While large banks will face relatively-less impact, smaller regional banks may find it harder to raise funds via AT-1 bonds.

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First published on: 23-03-2023 at 01:15 IST