Banks weigh tier-i bond sales to strengthen cap­i­tal base


State-run lenders Bank of Bar­oda, PNB, Cor­po­ra­tion Bank may soon sell such bonds

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 such as Bank of Bar­oda, Pun­jab Na­tional Bank (PNB), Cor­po­ra­tion Bank and two other banks may soon sell such bonds, ac­cord­ing to three mer­chant bankers. Bank of Bar­oda has board ap­proval to raise at least Rs500 crore through such AT-1 bonds, ac­cord­ing to the lender’s ex­change fil­ing. PNB also has an en­abling ap­proval to raise Rs3,000 crore of th­ese bonds in one or more tranches.

Brick­work Rat­ings has as­signed A+ rat­ing to Cor­po­ra­tion Bank’s pro­posed AT-1 bond of Rs1,000 crore, the bank had in­formed bourses.

“Some banks are in pre­lim­i­nary dis­cus­sions 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 im­pacted pric­ing as banks may have to shell out more,” said one of the three peo­ple, a Mum­bai-based mer­chant banker, re­quest­ing anonymity.

AT-I bonds, also called as per­pet­ual 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. Th­ese bonds have a call op­tion usu­ally af­ter the end of fifth or 10th year. 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 16 Au­gust, 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 30 Au­gust, with­out the fresh govern­ment cap­i­tal in­jec­tion.

On 9 Au­gust, the bank in­formed stock ex­changes that it has re­ceived Rs1,861 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 head-prod­ucts, Ko­tak Mahin­dra As­set Man­age­ment Co. Ltd.

Ac­cord­ing to bond deal­ers, pric­ing ex­pec­ta­tion of in­vestors will be key for the up­com­ing is­suances.

On 26 Septem­ber, Bank of In­dia de­ferred its plan to sell 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 sold AT-1 bonds worth lit­tle over Rs33,000 crore since the be­gin­ning 2017.

Ac­cord­ing to Fitch, In­dian banks need ad­di­tional cap­i­tal of $65 bil­lion to meet Basel-iii cap­i­tal norms, which will be fully im­ple­mented from the end of March 2019.

The cen­tre has bud­geted only an ad­di­tional $3 bil­lion in fresh eq­uity for 21 state-owned banks over the cur­rent and next fis­cal years.


The govern­ment has bud­geted only an ad­di­tional $3 bil­lion in fresh eq­uity for 21 state-owned banks over the cur­rent and next fis­cal years.

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