Yields On Perpetual Debt Of Indian Banks Spikes 

Yields on perpetual debt issued by Indian banks have risen sharply as mutual funds seeing redemption pressures are selling these bonds to generate liquidity.

Data from the National Stock Exchange shows that, yields on additional tier-1 bonds issued by both public and private sector banks have risen sharply over the past two weeks. AT-1 bonds are perpetual bonds and can be counted as tier-1 capital under the Basel-III norms.

As of Thursday April 30, yields on Punjab National Banks’ AT-1 bond, issued in 2017, had risen to 12.65 percent, while yields on Punjab and Sind Banks’ AT-1 bond, issued in the same year, had risen to 13 percent, data from the NSE shows.

With the exception of State Bank of India, HDFC Bank and ICICI Bank, yields on AT-1 bonds of most banks are trading in double digits.

According to a senior treasury official, yields on these debt instruments have risen as mutual funds have found it easier to sell these securities which have better liquidity than most other corporate debt.

Most credit funds, which have seen large redemptions, hold this paper and are selling to generate liquidity, the official said, speaking on condition of anonymity.

As of mid-March, mutual funds held more than Rs 37,000 crore worth of AT-1 bonds, BloombergQuint reported. Credit market funds have seen increased redemptions, particularly in the days following a decision by Franklin Templeton to wind-down six schemes.

The increase in yields being seen now follows another shock that hit the market for bank perpetual debt. The Reserve Bank of India’s decision to put Yes Bank under a moratorium in March led to AT-1 bond investments being wiped out as these instruments are considered to be ‘loss absorbing’ in nature.

“In March, yields across all perpetual bonds began to rise because of the Yes Bank issue as investors realized these bonds were not that safe and they could be written-off completely. Now yields are rising for AT-1 bank bonds because mutual funds are facing redemption pressure and need to generate liquidity,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.

He pointed out that yields on AT-1 bonds issued by public sector banks had risen to 14 percent in the last two days, mainly on account of redemption pressures for funds. The latest spike in yields is not related to the Yes Bank fiasco.

“Investors are demanding these bonds given that they are issued by strong PSU banks and private banks and there is less credit-risk compared to Yes Bank,” Manglunia said.

Over Rs 93,000 crore in bank AT-1 bonds were outstanding as of March, according to a report by ICRA.

SBI has the largest outstanding AT-1 bonds at Rs 27,432 crore, followed by ICICI Bank at Rs 10,120 crore, HDFC Bank at Rs 8,000 crore, Bank of Baroda at Rs 7,147 crore and Axis Bank at Rs 7,000 crore, according to ICRA.

Most of these AT-1 bonds were issued in 2017 and 2018, with a first call option after the fifth year from the date of issuance, which means that a large number of these bonds are due for call-in in 2022 and 2023, it said.