 "AT1 cloud likely to hit banks’ capital-raising plans, say experts")
Thanks to the controversy over Securities and Exchange Board of India’s (Sebi’s) circular on perpetual bonds, commercial banks, especially public sector lenders, are uncertain about their plans to raise about Rs 30,000 crore through additional tier I (AT1) bonds in the next financial year.
The exercise was planned to help replace part of the existing bonds that are set to mature soon and to enhance capital profile for growth.
A senior State Bank of India executive said the impact on the banking industry was very large. SBI has risk-weighted assets (RWA) of about Rs 22 trillion and it can issue raise AT1 bonds upto 1.5 per cent of that, i.e. about Rs 32,000-33,000 crore. “If this is avenue (AT1 bonds) is not available to us and other banks, capital raising is going to be badly impacted,” the executive added.
Bank executives said RWA in the banking system is about Rs 100 trillion, this would translate to an AT1 bond pool of about Rs 1.5 trillion. About 20-25 per cent is estimated to be annual issuance (for replacement and growth) or about Rs 30,000-40,000 crore.
A chief financial officer of a large private bank said there may be limited appetite for such instruments (AT1 bonds) as mutual fund investors would keep away. Though AT1 bonds are not the main component of capital, the controversy makes capital planning a challenge for FY22.
Banks have already taken up the matter with the finance ministry. The government is short on resources to provide additional capital to public sector banks beyond the Rs 20,000 crore it has already committed for FY22.
Meanwhile, yields on perpetual bonds issued by banks continued to rise amid uncertainties. Most AT1 bonds in the market belong to public sector banks.
The SBI’s perpetual bond, considered the best, has witnessed a surge in yields after the Sebi circular. The weighted average yield of the bond traded at 8.18 per cent, against its pre-circular closure of 7.28 per cent. That’s a surge in yields of over 90 basis points, most of which happened when the markets opened on Monday. Chennai-based Indian Bank’s perpetual bonds are now trading at 9.31 per cent, Bank of Baroda’s at 8.84 per cent, and Canara Bank’s at 8.50 per cent.
The yields of these banks have also risen about 100 bps since the circular.
The sudden movement in state-owned banks, however, did not lead to any meaningful rise in yields on private banks. That is because yields on these bonds were high even before the circular. Bond dealers say that is because investors’ trust has reduced in private banks’ AT1 bonds after the YES Bank episode, when about Rs 8,000 crore of bonds were written off.
IndusInd Bank’s perpetual bonds are now trading at 10.35 per cent, and South Indian Bank at 14.0566 per cent.
“This is a very good level to buy the bonds. Perpetual bonds of SBI are giving a return of 8 per cent, which should be attractive to investors. The issue will eventually settle, but the delay is causing mutual funds to become nervous. They are trying to cut their exposures on these bonds, and there will be huge interest among HNIs, and institutions for the perpetual bonds of state-owned banks,” said Joydeep Sen, fixed income consultant at Phillip Capital.
