BoB issues Rs 2,500 crore AT-1 bonds at 7.88%, cheaper than peers

Four PSU banks have raised Rs 7,800 crore AT-1 bonds so far in FY23 as credit demand booms

Bank of Baroda on Tuesday issued additional tier-1 (AT-1) bonds worth Rs 2,474 crore at a cutoff of 7.88 per cent, far lower than the rates at which fellow lenders in the public sector space, such as Canara Bank and Punjab National Bank issued such bonds last month, sources told Business Standard.

With Tuesday’s sale of AT-1 bonds, four public sector banks have raised a total of Rs 7,794 crore through this route so far this financial year, data provided by industry sources showed.

According to the data, Punjab National Bank sold AT-1 bonds worth Rs 2,000 crore on July 4, followed by Canara Bank, which also sold AT-1 bonds worth Rs 2,000 crore on July 15. Subsequently, Union Bank raised Rs 1,320 crore via this instrument.

That figure is set to go up sharply in the days ahead as the country’s largest lender State Bank of India is likely to issue AT-1 bonds worth Rs 7,000 crore in a single tranche by September first week, the sources said.

HDFC Bank, the largest private sector lender, is also likely to issue AT-1 bonds worth about Rs 2,500 crore.

Of late, banks have embarked on a slew of fund-raising plans in order to fund robust momentum in credit demand even as deposit growth lags far behind. Bank credit expanded 15.3 per cent year on year as of August 12, latest data released by RBI showed. Deposit growth was at 8.5 per cent during the period.

With Covid restrictions having been lifted after two years and with demand for credit seen picking up even further during the festive season, the trend of banks approaching markets for capital is set to continue, sources said.

Cheaper capital markets

At 7.88 per cent, the rate set for Bank of Baroda’s AT-1 bonds is far lower than the rate of 8.24 per cent shelled out by Canara Bank and the 8.75 per cent cutoff that was set for Punjab National Bank’s AT-1 bonds.

Analysts said cheaper access to debt capital this month is owing to two broad factors – a sharp decline in government bond yields, which are the benchmarks for pricing corporate debt and firm demand from insurance companies for debt offerings by highly-rated bonds sold by public sector firms.

Canara Bank, Punjab National Bank and Bank of Baroda’s bonds have all been rated AA+.

“You could say there was some softening of yields – about 10-20 basis points in the first and second weeks of July when the AT-1 issuances happened,” Anil Gupta, Vice-President, Financial Sector Ratings at Icra said.

“Since then, yields have largely cooled off. At the same time, you could attribute some part of it (the rates commanded by AT-1 bonds) to the opening up of the AT-1 instrument to insurance companies. There could possibly have been some more demand or perhaps the bidding was slightly more aggressive with the participation of insurance firms,” he said.

After climbing to an over three-year high of 7.62 per cent on June 16, yield on the 10-year benchmark government bond has eased significantly, with the paper settling at 7.19 per cent on Tuesday. The yield on the 10-year bond had hardened by 61 bps to 7.45 per cent in April-June.

Bond yields have declined sharply due to easing domestic inflationary pressures and a steep decline in global crude oil prices, which have led to hopes of the RBI slowing the pace of future rate increases.