HDFC Bank, SBI AT-1 rates set to influence pricing of other issuances

In an eventful week for bond markets, the country’s two largest lenders — State Bank of India (SBI) and HDFC Bank — are set to issue additional tier-1 (AT-1) bonds worth Rs 10,000 crore in the next couple of days in order to raise capital.

The cut-off rates that would be set for the bonds of the two banking sector giants could influence the pricing of debt sales by other lenders. HDFC Bank’s AT-1 issue marks the first one by a private bank so far this year. The country’s largest private bank is tapping debt capital markets for an AT-1 issuance for the first time since 2017.

Sources told Business Standard that Axis Bank was also making enquiries in the market about raising funds through AT-1 bonds. The pricing of HDFC Bank’s bonds is set to influence the potential bond issuance by Axis Bank. On Tuesday, HDFC Bank plans to sell a total of Rs 3,000 crore worth of AT-1 bonds, with the issue comprising Rs 2,000 crore of greenshoe option.

Treasury officials expect the cut-off rate for HDFC Bank’s bonds in the range of 7.8-7.9 per cent. The bonds will have a call option from the fifth year onwards and are rated AA+ by CRISIL, CARE and India Ratings, sources said.

On Wednesday, SBI plans to issue AT-1 bonds worth a total of Rs 7,000 crore, including a greenshoe option worth Rs 5,000 crore. SBI’s bond sale will mark the largest amount raised in a single tranche through AT-1 bonds so far in the current financial year.

Illustration: Binay Sinha

The cut-off rate for SBI’s bonds is seen at around 7.75 per cent, lower than 7.88 per cent set for an AT-1 bond issue by Bank of Baroda last week. It is also far lower than 8.75 per cent paid by Punjab National Bank for its AT-1 bond issuance in early July.

“The market buzz is that the people handling SBI’s bond sale have received a fair amount of bids — around 50 per cent of the sale — at 7.75 per cent. There are some who feel that the cut-off could be lower. There are some corporates who will bid lower in order to be successful,” a treasury official said.

“HDFC Bank last week was talking about a rate that’s lower than Bank of Baroda. There are the wealth guys, who are saying that HDFC Bank has not issued AT-1 bonds since 2017, so there would be aggressive demand. Axis Bank is also making enquiries. Its cut-off would be influenced by HDFC Bank’s and SBI’s cut-offs. Maybe, somewhere around 7.90-7.95 per cent,” he said.

With government bond yields having eased significantly since mid-June, banks have been making the most of relatively cheaper capital markets to raise funds amid booming credit growth. Sovereign bond yields are the pricing benchmarks for corporate debt.

After touching an over-three-year high of 7.62 per cent on June 16, yield on the 10-year benchmark bond has shed more than 40-basis points (bps). This is due to a fall in global oil prices and a softening domestic inflation trajectory. The 10-year bond yield closed at 7.22 per cent on Monday.

Following the bond sale by HDFC Bank, SBI and a planned Rs 710-crore AT-1 bond issue by Bank of Maharashtra on Tuesday, the total quantum raised by banks through these instruments so far in the current financial year would rise to Rs 18,504 crore, sources said.

“Public banks will lead the AT-1 issuances in FY23 as well, driven by their growth requirements rather than their rollover requirements. Investor appetite for their issuances remains strong unlike previous expectations after the changes in the valuation norms for these instruments held by mutual funds,” analysts from rating agency ICRA wrote recently.

Last week, Reserve Bank of India Governor Shaktikanta Das said banks should raise more capital from markets amid global uncertainties and in order to finance firm loan growth.

As on August 12, bank credit grew 15.3 per cent year-on-year, while deposit growth lagged far behind at 8.8 per cent over the same period, latest RBI data showed.