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Public Sector Banks Successfully Roll Over AT-1 Bonds Due In FY22: ICRA

PSBs raise fresh AT-I bonds nearly equivalent to the call options due in FY22.

<div class="paragraphs"><p>People wait outside automatic teller machine booths. (Photographer: Dhiraj Singh/Bloomberg)</p></div>
People wait outside automatic teller machine booths. (Photographer: Dhiraj Singh/Bloomberg)

All public sector banks successfully rolled over additional tier-1 bonds with call option due this fiscal, according to ICRA Ltd. This, despite concerns stemming from a change in regulations for mutual funds and the volume of such issuances this year.

According to the rating firm's estimates, call options were coming due for bonds worth Rs 28,430 crore in the ongoing financial year. This included Rs 20,505 crore in AT-1 bonds of public sector banks and Rs 7,925-crore bonds from private sector banks. A majority of these bonds, or Rs 19,750 crore, were coming due in the second half ending March.

Ahead of this, most lenders have managed to replenish the capital. Rs 37,202 crore has been raised collectively by private and public sector banks, ICRA said.

The demand from mutual fund investors remained muted and the AT-1 bonds of state-owned lenders were subscribed by other private banks, (which sell down to other investors), pension funds and corporate treasuries, according to ICRA. The coupon on the fresh bonds issued by the banks largely remained similar or lower than the cost of capital being replaced, the rating agency said.

The Securities and Exchange Board of India had revised norms to cap the exposure of debt mutual funds to these Basel III debt instruments issued by banks at 10%, and not more than 5% to a single issuer. As mutual funds were a large investor segment in these bonds, the changes were expected to impact the demand for these instruments issued by the banks.

“The rollover of the AT-1 bonds by public banks at competitive rates compared to their earlier issuances is a positive for the capital ratios and also reduces the recapitalisation burden of the GoI (government)," Anil Gupta, vice president-financial sector ratings at ICRA, said in the statement.

While we still await the bank wise allocation of the budgeted capital infusion of Rs 20,000 crore into PSBs in FY22, with the improved profitability and equity capital raise from markets, the near-term capital requirements remain negligible for most public banks for regulatory as well as growth requirements.
Anil Gupta, Vice President–Financial Sector Ratings, ICRA

To counter uncertainty in the appetite of domestic investors, some of the private banks including HDFC Bank Ltd. and Axis Bank Ltd. raised AT-1 bonds in the overseas markets. ICICI Bank Ltd. is yet to raise AT-1 in the current fiscal but given its "strong capital position", it may decide not to do so, ICRA said.

Relatively attractive yields on these bonds was not the only factor that supported the issuance, according to ICRA. The public sector lenders' improved ability to service the coupon on these bonds also helped.

“In FY21 and FY22, almost all PSBs wrote off their accumulated losses against their share premium after receiving approval from the Government of India and the Reserve Bank of India," ICRA said. "The coupon on these bonds is payable from the profits generated by the bank during the year and accumulated profits from the past.”

As the lenders wrote off the losses, their ability to service the AT-1 bonds improved, the rating firm said. This also led to credit rating upgrades on the AT-1. That, ICRA said, coupled with the improved outlook on the earnings of public sector lenders "supported the issuance of these bonds".