Punjab National Bank was the first to hit the market, raising ₹2,000 crore through AT-1 bonds at 8.75% this month. Canara Bank, too, raised ₹2,000 crore, but at a lower interest rate of 8.24%.
AT-1 bonds, also called perpetual bonds, carry no maturity date, but have a call option at the end of five years. These are issued by banks to augment their core equity base, and thus comply with Basel III norms.
According to data compiled by rating agency ICRA Ltd, banks raised a total of ₹42,000 crore via AT-1 bonds last fiscal year. Out of this, ₹28,500 crore was raised by public sector banks, and ₹12,000 crore by private sector banks HDFC Bank and Axis Bank in the overseas market.
Market participants are expecting AT-1 bond issuances from Union Bank and State Bank of India in the coming months. According to ICRA, public sector banks are likely to issue ₹14,000-16,000 crore worth of AT-1 bonds this fiscal year.
Bankers say they are looking to raise capital via AT-1 bonds in anticipation of strong credit growth this year. According to a report by Bank of America Merrill Lynch on Monday, banking system credit growth is likely to exceed 12-13% in FY23. The fortnight ended 1 July saw a sharp credit growth of 14.4%, up from 6.1% in the corresponding period last year.
The second reason is that call options are due on bonds issued by many banks this year, and banks could look at replacing these bonds with AT-1 bonds. According to ICRA, PSU banks have call options due of ₹7,300 crore this fiscal against ₹20,500 crore last fiscal. Private sector banks, meanwhile, have ₹18,000 crore of call options due this year.
“Assuming the (public sector) banks were to maintain the same level of AT-1 capital on increased RWAs (risk-weighted assets) by the end of FY23, they will need to raise ₹70-80 billion ( ₹7,000-8,000 crore) of growth capital and ₹8,000 crore of replacement AT-1 bonds. Accordingly, overall AT1 issuances by public sector bank is estimated at ₹140-160 billion ( ₹14,000-16,000 crore) in FY23," ICRA said in its report.
“SBI itself has ₹2,500 crore of call options falling due this year. We will, however, look at raising more capital because credit growth will happen," an SBI official said on the condition of anonymity.
Investors like these bonds as they offer better returns compared to government securities. For example, AT-1 bonds of Canara Bank earn investors an annual coupon of 8.24%, while 10-year government bond yields are at 7.44%.
The market for AT-1 bonds in India took a hit in March 2020, when Yes Bank’s AT-1 bonds of nearly ₹8,400 crore were written off as part of a bailout led by SBI. Soon after, the Securities and Exchange Board of India (Sebi) tightened rules, allowing private placement of these bonds only to institutional investors with minimum lot size of ₹1 crore. All this led to slowing down of investor appetite for these bonds.
“The risk premia should be higher as end investor has to be cautioned. The issuer is getting pricing comparable to 10-year state development loans. Investors are pricing these bonds as five-year instruments instead of treating it as long-term bonds with a five-year call option," said Venkatakrishnan Srinivasan, founder, Rockfort Fincap. “That said, AT-1 bonds are the best available option for PSU banks to raise capital in this market," he added.
