Top banks eye overseas AT1 bond sale as domestic investors turn wary, BFSI News, ET BFSI
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Five top lenders, including HDFC Bank, Axis Bank and State Bank of India, are looking to raise up to $2 billion overseas in the next few months through Additional Tier I (AT1) as they anticipate an increase in credit demand.
State Bank of India, plans to raise upto Rs 14,000 crore through additional tier-I bonds (AT1 bonds) in the current financial year (FY22) to enhance capital adequacy profile.
The Central Board approved the capital raise by way of issuance of Basel lll-compliant debt instruments in rupee and/or US dollar in FY22, the bank said last month.
Canara Bank is planning to raise up to Rs 3,400 crore in capital by issuing fresh AT1 bonds.
These bonds are expected to offer yields between 4 per cent and 5 per cent. Covering currency risks, the total cost may go up to 9 per cent.
AT1 bonds
AT1 bonds, also known as perpetual bonds, add to a bank’s capital base and allow a lender to meet fund adequacy thresholds set by regulators. Such securities do not have any fixed maturity but generally have a five-year call option, giving defined exit routes to investors. These papers are always rated one or two notches below the same issuer’s
general corporate rating. Domestic investors, including mutual funds, are wary of AT1 bonds after Yes Bank wrote off over Rs 8,000 crore of such bonds during its bailout in 2020.
State Bank of India was the only bank from the country to raise AT1 bonds overseas in 2016. Five-year call options on that series of AT1 bonds could be exercised this year.
Between FY18 and FY21, perpetual bond sales by banks have nearly halved to Rs 18,772 crore from Rs 34,860 crore three years ago. In FY22, AT1 bond sales have so far been negligible.
Sebi directive
Capital market regulator Sebi has eased the valuation rule pertaining to perpetual bonds in March last year.
The move came after the finance ministry asked the Securities and Exchange Board of India (Sebi) to withdraw its directive to mutual fund houses to treat additional tier-I (AT-1) bonds as having maturity of 100 years as it could disrupt the market and impact capital-raising by banks.
Sebi said the deemed residual maturity of Basel III AT-1 bonds will be 10 years until 31 March, 2022, and would be increased to 20 and 30 years over the subsequent six-month period.
From April 1, 2023, onwards, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bonds.
In addition, Sebi said that deemed residual maturity of Basel III Tier 2 bonds would be considered 10 years or contractual maturity, whichever is earlier, until March 2022. After that, it will be in accordance with the contractual maturity.
AT-1 bonds are considered perpetual in nature, similar to equity shares as per the Basel III guidelines. They form part of the tier-I capital of banks.
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