Banks raise over Rs 37,000 cr via AT1 bonds amid concern over capital ratio
Indian banks have raised over Rs 37,000 crore by issuing new additional tier 1 (AT1) bonds this financial year (FY22). The amount is over Rs 28,430 crore worth of AT1 bonds for which call options are due in FY22, addressing concerns over rollovers and capital ratios.
According to rating agency ICRA, Rs 20,505 crore of Public Sector Banks (PSB) AT-I Bonds and Rs 7,925 crore of Private Sector Banks (PVB) Bonds are due for the exercise of the l ‘Purchase option. Most of the bonds (worth Rs 19,750 crore) are due in the second half (H2 FY2022).
All PSBs have largely raised AT-I bonds nearly equivalent to call options due in fiscal 2022, likely preserving their capital ratios, the ICRA said.
Investor demand for mutual funds remained subdued and PSB AT-I bonds were taken up by other PVBs, pension funds and corporate treasuries. The coupon on bonds issued by banks remains broadly similar to or lower than bonds on which the call option must be exercised this year, the ICRA said.
Interest from mutual funds, active investors in AT1 bank bonds, has been very low after the Securities and Exchange Board of India revised the standards for investment by debt schemes in Basel III debt instruments . The capital market regulator has also changed the rules for valuation of perpetual bonds issued by banks, non-bank financial companies (NBFCs) and corporations)
Renewal of AT-I bonds by public banks at rates competitive with their previous issuances is positive for capital ratios, said Anil Gupta, vice president, Financial Sector Ratings at ICRA. It also reduces the government’s recapitalization burden.
There were apprehensions about the refinancing of these debt securities, especially for public sector banks, due to the perceived weakness of their finances compared to their private counterparts, large upcoming refinancings and revised regulations.
Moreover, foreign investors’ appetite for AT-I bonds could also have been uncertain given their low stand-alone credit profile and the characteristics of the instruments.
Given the impact of SEBI regulations and uncertainty about domestic investor appetite, private banks, such as HDFC Bank and Axis Bank, also raised AT-I bonds in overseas markets.
Also, some banks like ICICI Bank have not yet lifted AT-I in the current fiscal year, but with a strong capital position, they might decide not to.