Canara Bank, PNB likely to issue Rs 3,000-crore AT1 bonds this week

AT1 issuances are likely to cross Rs 20,000 crore mark as banks rush to tap capital markets

State-owned Canara Bank and Punjab National Bank are likely to raise capital worth a total of around Rs 3,000 crore through the issuance of additional tier-1 (AT1) bonds this week, sources told Business Standard.

Canara Bank is expected to raise Rs 2,000 crore via AT1 bonds on Wednesday, sources said, adding that the lender’s bond sale includes a greenshoe option of Rs 1,500 crore.

Canara Bank’s bonds would be rated AA+, the sources said.

While the dates for Punjab National Bank’s issuance are not yet clear, the state-owned lender is expected to tap the debt capital market for AT1 bond issuance of Rs 1,000 crore, including a greenshoe option of Rs 500 crore, sources said.

Banks have raised Rs 18,376 crore through AT1 bonds so far in the financial year.

Treasury officials expect the cut-off rate for Canara Bank’s AT1 bonds at 7.90-8.00 per cent, while that for Punjab National Bank’s papers is seen at around 8.50-8.60 per cent. The cut-off rate refers to the interest that banks shell out for the funds raised through AT1 bonds.

“On Canara Bank’s AT-1 issue, there is some buzz about insurance company demand at around 7.90-7.95 per cent levels but it seems more realistic that Canara would be over 8 per cent when an entity like SBI has issued at 7.75 per cent,” a treasury official said.

“Certain investors like large insurance companies generally look to bid at a spread which is based on an internal calculation — G-sec plus spread for triple AAAs plus spread for double AA. That would apply in the case of Canara Bank as well. If SBI received bids around 7.75-7.89 per cent, Canara Bank could be close to 7.95-8.00 per cent,” he said.

The official said that given that Punjab National Bank’s expected debt offering was of a smaller size than the state-owned lender’s previous AT1 bond sale in July, the cut-offs could be accordingly lower.

On July 4, Punjab National Bank issued AT1 bonds worth Rs 2,000 crore at a cut-off rate of 8.75 per cent.

“This time if it’s a small issue, it can come around 8.50-8.60 per cent. Some papers like Union Bank are trading around 8.65 per cent, so this one (PNB) can be around those levels,” the official said.

Over the past two-and-a-half months, banks have made a beeline to raise capital through the issuance of AT1 bonds as a combination of factors, including softening government bond yields, have made it cheaper for lenders to access debt capital markets.

An increase in demand from insurance companies and high net-worth individuals, along with an improvement in the financial position of banks, has also spurred demand for AT1 bonds.

The last time Canara Bank issued such bonds was on July 15, when it sold Rs 2,000 crore worth of AT1 papers at a cut-off rate of 8.24 per cent, which at the time was considered to be an unusually low rate.

Since then, the rates paid by banks to issue such bonds has progressively declined with Bank of Baroda selling AT1 bonds worth Rs 2,474 crore on August 30 at 7.88 per cent.

Subsequently, in the first week of September, the country’s two largest lenders HDFC Bank and State Bank of India sold AT1 bonds at cutoff rates of 7.84 per cent and 7.75 per cent, respectively.