PSBs roll over AT1 bonds ahead of call option in FY22

According to an estimate of the agency, around Rs 20,505 crore of AT1 bonds of PSBs and Rs 7,925 crore of private banks are due for call option in FY22 with a majority of Rs 19,750 crore due in the second half.

Misunderstandings are likely to creep into this symbiotic relationship. Trust will be at a premium. Divergent viewpoints will lead to volatility.
Misunderstandings are likely to creep into this symbiotic relationship. Trust will be at a premium. Divergent viewpoints will lead to volatility.

By Manish M Suvarna

Public sector banks (PSBs), the largest issuers of additional tier-I (AT1) bonds in the last few months, have successfully rolled over their AT1 bonds at a lower or similar coupon compared with the previous issuances. These bonds were due for the exercise of the call option in the current financial year, ICRA said in a release.

Five state-owned lenders – Bank of Baroda, State Bank of India, Canara Bank, Punjab National Bank, and Union Bank of India – together raised nearly Rs 24,471 crore through AT1 bonds in FY22, according to ICRA’s data. According to an estimate of the agency, around Rs 20,505 crore of AT1 bonds of PSBs and Rs 7,925 crore of private banks are due for call option in FY22 with a majority of Rs 19,750 crore due in the second half.

“The rollover of AT1 bonds by public sector banks at competitive rates compared to their earlier issuances is a positive for the capital ratios and reduces the recapitalisation burden of the GoI,” a release quoted Anil Gupta, vice president – financial sectors ratings, ICRA, as saying.

The demand for AT1 bonds remained muted from mutual funds after Sebi earlier this year revised norms for investments by debt mutual funds in the Basel-III debt instruments issued by banks and valuation of perpetual bonds. But most bonds were subscribed by other investors such as pension funds and corporate treasuries.

PSBs have to take prior approval from the government to issue AT1 bonds as per the circular issued in February 2018 as weak financials of some banks can significantly increase the risk of the coupon skip. Meanwhile, private lenders did not tap the domestic market and preferred overseas markets. HDFC Bank and Axis Bank opted for overseas markets and raised funds via AT1 bonds.

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