Amid lower demand, banks plan sale of tier-i bonds
MUMBAI: Banks are planning to sell Basel-iii compliant additional tier-i bonds (AT-1) in a bid to strengthen their capital base at a time when investors’ appetite for such instruments is lower because of prevailing asset quality issues.
State-owned banks like Bank of Baroda, Punjab National Bank, Corporation Bank and two other banks may soon come up with issuance of such bonds, according to three merchant bankers.
Bank of Baroda has board approval to raise at least ₹500 crore through such At-1bonds, according to the lender’s exchange filing. PNB also has an enabling approval to raise ₹3,000 crore of these bonds in one or more tranches.
Brickwork Ratings has assigned A+ rating to Corporation Bank’s proposed AT-1 bond of ₹1,000 crore, the bank had informed bourses.
“Some banks are in preliminary talks on the market conditions and likely investor demand before taking a final call on the timing of bidding process. Given the asset quality issues of banks, investors’ appetite is limited to select large banks. Additionally, rising yields have also impact pricing as banks may have to shell out more,” said the first person, a Mumbai-based merchant banker requesting anonymity.
AT-I bonds, also called as per- petual bonds, are perceived as risky instruments. This is because the issuing bank has the prerogative of skipping coupon payments in case they don’t have enough profits or have enough distributable reserves.
As risk-premium against these clauses, investors often demand a higher yield. However, in case of public sector banks, government guarantee is taken as a given because a default will be seen as sovereign default. This was seen in the case of IDBI Bank.
In a note dated August 16, rating agency Fitch had said that IDBI Bank may have been at the risk of skipping coupon payment on the AT-1 bonds, scheduled on August 30 without the fresh government capital injection. On August 9, the bank informed bourses that it received ₹1,861 crore from the government.
“Investors have assumed government support in event of default but the pricing expectation on AT-1 bonds is reflective of the nature of these instruments and the asset quality and capital position of individual banks,” said Lakshmi Iyer, chief investment officer (debt) and headproducts, Kotak Mahindra Asset Management Co. Ltd.
On September 26, Bank of India deferred its plan to see tier-i bonds because of higher pricing. The bank had got 11.50% as the lowest coupon bid whereas it had expected to price the bonds in the range of 10.50-10.70%. During the same time, Allahabad Bank priced its AT-1 bonds at 11.85%, the highest coupon set in 2017, according to bond dealers.
Banks have so sold AT-1 bonds worth little over ₹33,000 crore so far since start of 2017.