SBI, Canara, Bank of Baroda plan to raise Rs 7,500 crore through AT-1 bonds

Banks may be looking to raise funds before rates harden further

Some public-sector banks, including State Bank of India (SBI), the country’s largest lender, are planning to raise around Rs 7,500 crore through additional tier I bonds, sources told Business Standard.

Canara Bank is planning to issue bonds worth Rs 2,000 crore. So is Bank of Baroda, while SBI is likely to rake in Rs 3,000-3,500 crore, sources said.

Indian Overseas Bank too is likely to tap the debt market, sources said, although how much it will raise is not known. “Canara Bank has a requirement; it has taken a rating also. It has some tier-1 call options to be exercised,” a senior treasury official aware of the developments said.

“SBI may not yet have taken the approval; it does generally after the first quarter. So after declaring the first-quarter results it is likely to come in.”

At a meeting on June 24, Canara Bank’s board had approved raising capital through Basel III-compliant additional tier I bonds of Rs 5,500 crore this financial year.

In May, Bank of Baroda’s board had approved raising additional capital up to Rs 2,500 crore through additional tier I bonds in tranches up to May 31, 2023.

Last month, Indian Overseas Bank’s board gave approval for raising tier II capital worth up to Rs 1,000 crore.

On Monday, Punjab National Bank sold additional tier I bonds worth Rs 2,000 crore at 8.75 per cent, lower than the 9-9.25 per cent expected earlier. The issue was the first for a state-owned bank this financial year. The pricing of the bonds was influenced by a recent decline in government bond yields amid fears of a global economic downturn.
 

Sovereign bonds are the pricing benchmark for debt issued by other entities.

According to treasury officials, banks could raise debt one after another at the prevailing market rates because interest rates are likely to go up.

After raising the repo rate by 90 basis points since May 4, the Reserve Bank of India (RBI) is expected to tighten monetary policy again at its next review in early August to tackle inflation.

The yield on the 10-year triple-A rated corporate bond has climbed 54 basis points to 7.71 per cent since March 31, the Bloomberg data showed.

Those on the triple-A-rated three- and five-year corporate bonds have hardened more over the same period because short-term debt is more sensitive to interest rate expectations. The bulk of the corporate fund-raising is conducted through shorter-maturity debt.

The yield on the three-year corporate bond has climbed 133 basis points to 8 per cent since March 31, while that on the five-year bond has risen 107 basis points to 8.19 per cent, the data showed.

The issuing of additional tier I bonds by state-owned banks comes after a phase of risk aversion as far as these instruments are concerned following the YES Bank crisis in 2020.

As part of the restructuring plan for the beleaguered lender, the RBI had in 2020 proposed a write-down of YES Bank’s additional tier I bonds.

 It was estimated that the holders of those bonds, such as mutual funds and retail investors, lost over Rs 10,000 crore because of the write-down.

Additional tier I bonds pay an annual coupon — or rate of interest — to investors but do not have a maturity date.

These instruments are appealing because they typically give higher returns than fixed deposits do.

In March 2021, the Securities and Exchange Board of India had announced a change in valuation norms for additional tier I bonds. According to such norms, from April 2023, the residual maturity of these papers will become 100 years from the date the bond is issued.

It is because of these norms that entities such as insurers and pension funds have expressed an interest in these securities. Mutual funds, which earlier were large buyers of such debt, have not done so.