Fundraising through AT1 and tier II bonds nearly doubles in 2022

Capital raising through additional tier I bonds (AT1 bonds) and tier II bonds almost doubled to Rs 82,370 crore in calendar year 2022 over 2021.

Of this, the use of tier II bonds was much higher and their issuance by lenders saw over a three-fold rise to about Rs 53,000 crore.

Debt-market analysts and treasury executives said private-sector banks like HDFC Bank and Axis Bank had been active in issuing tier II bonds.

Public-sector banks were in the market but the size of issues was relatively small.

Banks raised just over Rs 30,000 crore through the Tier I bin in calendar 2022 as against close to Rs 28,000 crore in 2021, according to estimates by the J M Financial Services group.

Bank executives said they had weighed comparative costs vis-a-vis deposits and infrastructure bonds in raising funds through Tier II instruments.

Banks need capital to support high credit growth (17.4 per cent year-on-year growth till the middle of December 2022).

Anil Gupta, senior vice-president, ICRA, said while AT2 was 10-year paper, these instruments also had a call option at the end of five years.

This provides an opportunity for re-pricing the bonds. It is a bond with a short tenure compared to infrastructure bonds, having at least a seven-year maturity.

The disadvantage is that AT2 is slightly costlier than infrastructure bonds. But it has two advantages: One, it adds to the bank’s capital; second, in the current scenario when interest rates have shot up, this fixed-rate liability remains only for five years whereas infra bonds remain with the investor for seven years.

Gupta, however, said perceptions about the future interest rate trajectory could differ, based on the bank’s view.

Referring to the cost of funds and outlook, analysts said fund raising happened at a higher coupon, given the hardening of interest rates.

Pressure may intensify in January-March 2023, given the tight liquidity conditions.

State Bank of India may be coming up with AT1 bonds. It has approval to raise up to Rs 10,000 crore and its board is meeting on January 4 to consider fund raising through infrastructure bonds.

Scheduled commercial banks (SCBs) are on a sound wicket as far as capital adequacy is concerned. They are well capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders, said the Reserve Bank of India’s Financial Stability report (FSR) of December 2022.

Under the baseline scenario, the aggregate capital adequacy ratio of 46 major banks is projected to slip from 15.8 per cent in September 2022 to 14.9 per cent by September 2023. It may go down to 14 per cent in the medium-stress scenario and to 13.1 per cent under the severe-stress scenario by September 2023.

But it stays well above the minimum capital requirement, including the capital conservation buffer requirement (11.5 per cent).

None of the 46 SCBs would breach the regulatory minimum capital requirement of 9 per cent in the next one year even in a severe-stress situation, the FSR said.