Banks’ AT-1 bond issuances likely to halve to ₹20,000 crore in FY23

The issuance of Additional Tier-1 (AT-1) bonds by banks is likely to more than halve to ₹20,000 crore this fiscal compared with the all-time high amount of ₹42,800 crore raised in FY22, ICRA Ratings said in the report on Monday.

AT-1 bonds are 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. 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 ₹32,100 crore for state-owned banks and ₹10,900 crore for private sector lenders. In FY18, the amounts stood at ₹10,900 crore and ₹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 raised ₹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 ₹1.02 lakh crore and is expected to touch ₹1.1 lakh crore by March 31, 2023, the agency said.

The rating agency’s vice-president Anil Gupta said a bulk of the ₹20,100 crore of the new issuances would be from state-owned lenders to fuel their growth aspirations while the private sector banks would be “modest” depending on 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% compared with 7.25% on a five-year government bond and 7.55% on a five-year AAA corporate bond, the agency said.