Amid lower de­mand, banks plan sale of tier-I bonds

Hindustan Times ST (Jaipur) - - World - Alekh Archana

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.


Ac­cord­ing to Fitch, In­dian banks need ad­di­tional cap­i­tal of $65 bil­lion to meet Basel­III cap­i­tal norms

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.