Three commercial banks, including State Bank of India (SBI), Canara Bank and Axis Bank, are likely to raise about Rs 7,500 crore in capital through additional tier I (AT I) bonds before the end of December 2021. They will benefit from being able to raise money at cheaper rates following one notch rating upgrade of the AT I at four public sector lenders on strengthening of their overall credit profile, bond dealers said.
The instruments of Canara Bank and Indian Bank were upgraded from ‘AA’ to ‘AA+’. Punjab National Bank and Union Bank’s bonds were upgraded from ‘AA-’ to ‘AA’.
There is improvement in capital cushions over minimum regulatory requirement, improvement in both profitability as well as the distributable reserves position of these four PSBs, CARE said.
Ajay Manglunia, managing director (MD) & head institutional fixed income, JM Financial, said this upgrade is expected to further increase interest in bonds issued by PSBs. It will also bring down pricing by 15-20 basis points for upcoming AT I bond issues.
Another public sector lender Bank of Baroda on Wednesday raised Rs 2,000 crore through AT I bonds at 7.95 per cent. The response from the market was strong with demand in excess of Rs 5,000 crore but the bank raised the indicated amount, debt market sources said.
In September 2021, SBI had raised Rs 4,000 crore in capital through AT I bonds at a coupon rate of 7.72 per cent.
Under Reserve Bank of India’s (RBI’s) regulatory norms, the issuing bank has full discretion over coupon payments at all times on these instruments. A bank may not pay a coupon if it does not have sufficient distributable reserves to service the coupon on AT I bonds.
These bonds also have loss-absorption features through conversion, write-downs and write-offs on breach of pre-specified trigger on capitalisation requirement.