Banks' AT-1 bond issuances may decline to Rs 20,000 cr in FY23: Report

The issuance of Additional Tier-1 (AT-1) bonds by banks is likely to more than halve to Rs 20,000 crore this fiscal compared to the all-time high amount of Rs 42,800 crore raised in FY22, says a report.

AT-1 bonds are those debt instruments without a terminal maturity date.

In FY22, a majority of the funds raised through the instrument were to refinance bond issues done in FY17, Icra Ratings said in the report on Monday.

Majority of the bonds have a call option in the fifth year, resulting in the significant jump in new issuances which are basically for refinancing the earlier obligations.

The issuances in FY17 stood at Rs 32,100 crore for the state-owned banks and Rs 10,900 crore for private sector lenders. In FY18, the amounts stood at Rs 10,900 crore and Rs 23,500 crore, respectively, Icra said.

According to the report, lenders have already refinanced the FY18 bonds because of the lower interest rates in FY22.

Lenders have already raised Rs 5,320 crore from the instrument in the first four months of FY23.

As the net of new offerings and redemptions between April and July 2022, the AT-1 bonds outstanding as on July 31 was Rs 1.02 lakh crore and is expected to touch Rs 1.1 lakh crore by March 31, 2023, the report said.

The rating agency's Vice President Anil Gupta said a bulk of Rs 20,100 crore of the new issuances will be from state-owned lenders to fuel their growth aspirations while the private sector banks will be "modest" depending on the market opportunities.

On the demand side, investors are also more desirous of betting on AT-1 bonds now, driven by the public sector banks' improved financial positions.

Yields on the AT-1 bonds recently issued by the public banks ranged from 8 to 8.75 per cent compared to 7.25 per cent on a five-year government bond and 7.55 per cent on a five-year AAA corporate bond, the report said.