Don’t miss the latest developments in business and finance.

Canara Bank mops up Rs 3,000 crore in additional Tier-I bonds at 8.27%

Canara Bank managed to secure funding at a lower-than-expected 8.27 per cent -- a positive indicator for other lenders preparing to tap the AT-1 market in the near term

Canara bank
Photo: Wikimedia Commons
Subrata PandaAnjali Kumari Mumbai
3 min read Last Updated : Aug 28 2024 | 12:12 AM IST
State-owned Canara Bank on Tuesday raised Rs 3,000 crore through the issuance of additional tier-1 (AT-1) bonds at an 8.27 per cent coupon rate, people familiar with the transaction revealed. The coupon rate came in slightly below market expectations, signalling favourable conditions for other banks considering similar issuances.

This marks the first AT-1 bond issuance by a major bank in 2024-25, as well as the first issuance of its kind since the markets regulator, Securities and Exchange Board of India (Sebi), allowed mutual funds to value these papers as per “yield to call (YTC)”, instead as 100-year papers.

The AT-1 bonds issued by Canara Bank come with a call option in the fifth year from the date of allotment, giving the bank the opportunity to redeem the securities at that point. The bond offering had an initial base size of Rs 1,000 crore, with a greenshoe option to raise an additional Rs 2,000 crore, which the bank fully exercised.

Market participants had anticipated a coupon rate ranging from 8.30 per cent to 8.35 per cent. However, Canara Bank managed to secure funding at a lower-than-expected 8.27 per cent -- a positive indicator for other lenders preparing to tap the AT-1 market in the near term.

According to sources, other state-owned banks, including State Bank of India (SBI), are also looking to raise capital via similar instruments in the coming months, as lenders position themselves ahead of potential rate cuts by the US Federal Reserve. “More banks are expected to raise funds through Tier-I and Tier-II bonds in September, because there is expectation of rate cuts by the Federal Reserve. These banks are hoping to raise money at lower rates”, said a dealer at a state-owned bank. 

SBI, India’s biggest public sector bank, has already announced plans to raise Rs 7,500 crore through tier-II bonds. The bank is inviting bids for the issuance on August 28, with an initial offering size of Rs 5,000 crore and a greenshoe option of Rs 2,500 crore. In the previous financial year (FY24), banks raised Rs 17,516 crore through AT-1 bonds -- a significant decline from the Rs 34,394 crore raised in FY23.

AT-1 instruments are perpetual bonds issued by banks to meet their regulatory capital requirements.  Canara Bank’s capital-to-risk weighted assets ratio (CRAR) stood at 16.38 per cent for the quarter ended June 30, 2024, providing it with a comfortable capital buffer.

Although AT-1 bonds lack a set maturity date, issuers make periodic interest payments and have the option to call the bonds after a specified period.

Earlier, tweaking the valuation framework for such instruments, Sebi stated that mutual funds need to value AT-1 bonds held by them based on the YTC methodology, in line with the recommendation of the National Financing Reporting Authority’s (NFRA) report to the Department of Economic Affairs. YTC represents the return an investor can expect to earn on a bond, provided he/she holds the bond until the first call date.

Previously, Sebi had instructed mutual funds to value AT-I bonds as 100-year instruments.

AT-I bond issuances by banks over the years 
  Amount Raised 
FY17 44,480
FY18 32,855
FY19 10,747
FY20 10,815
FY21 18,723
FY22 29,984
FY23 34,394
FY24 17,516
FY25 (so far) 3,000
   
Source: ICRA 

Topics :Canara BankBondsFundraising

Next Story