Mumbai:Â Banks are planning to sell Basel-III compliant additional tier-I bonds (AT-1) in a bid to strengthen their capital base, at a time when investorsâ€™ appetite for such instruments is lower because of prevailing asset quality issues.
State-owned banks such as Bank of Baroda, Punjab National Bank (PNB), Corporation Bank and two other banks may soon sell such bonds, according to three merchant bankers.Â Bank of Baroda has board approval to raise at least Rs500 crore through such AT-1 bonds, according to the lenderâ€™s exchange filing. PNB also has an enabling approval to raise Rs3,000 crore of these bonds in one or more tranches.
Brickwork Ratings has assigned A+ rating to Corporation Bankâ€™s proposed AT-1 bond of Rs1,000 crore, the bank had informed bourses.
â€śSome banks are in preliminary discussions on the market conditions and likely investor demand before taking a final call on the timing of bidding process. Given the asset quality issues of banks, investorsâ€™ appetite is limited to select large banks. Additionally, rising yields have also impacted pricing as banks may have to shell out more,â€ť said one of the three people, a Mumbai-based merchant banker, requesting anonymity.
AT-I bonds, also called as perpetual bonds, are perceived as risky instruments. This is because the issuing bank has the prerogative of skipping coupon payments in case they donâ€™t have enough profits or have enough distributable reserves.Â These bonds have a call option usually after the end of fifth or 10th year. As risk-premium against these clauses, investors often demand a higher yield. However, in case of public sector banks, government guarantee is taken as a given because a default will be seen as sovereign default. This was seen in the case of IDBI Bank.
In a note dated 16 August, rating agency Fitch had said that IDBI Bank may have been at the risk of skipping coupon payment on the AT-1 bonds, scheduled on 30 August, without the fresh government capital injection.
On 9 August, the bank informed stock exchanges that it has received Rs1,861 crore from the government.Â â€śInvestors have assumed government support in event of default but the pricing expectation on AT-1 bonds is reflective of the nature of these instruments and the asset quality and capital position of individual banks,â€ť said Lakshmi Iyer, chief investment officer (debt) and head-products, Kotak Mahindra Asset Management Co. Ltd.
According to bond dealers, pricing expectation of investors will be key for the upcoming issuances.
On 26 September, Bank of India deferred its plan to sell tier-I bonds because of higher pricing. The bank had got 11.50% as the lowest coupon bid whereas it had expected to price the bonds in the range of 10.50-10.70%.
During the same time, Allahabad Bank priced its AT-1 bonds at 11.85%, theÂ highestÂ coupon set in 2017, according to bond dealers.
Banks have sold AT-1 bonds worth little over Rs33,000 crore since the beginning 2017.
According to Fitch, Indian banks need additional capital of $65 billion to meet Basel-III capital norms, which will be fully implemented from the end of March 2019.
The centre has budgeted only an additional $3 billion in fresh equity for 21 state-owned banks over the current and next fiscal years.