Indian banks’ dependence on AT1 bonds limited, impact on pricing: Analysts

A decision to write down Credit Suisse’s additional tier-1 bonds to zero after the bank agreed to be bought by UBS will weigh on the pricing of such notes and spook investors, Citi analysts said on Tuesday.

Indian lenders, however, have limited dependence on such securities, Jefferies said in a note.

“Another instance of AT-1 bond write-off questions seniority of claims of AT-1 bond holders and dampens sentiments for AT-1 market issuances,” Citi analysts wrote in a note.

AT-1 bonds are hybrid securities which have loss absorbing features and can be written-down under certain scenarios, including a depletion of capital.

The AT-1 bonds of India’s Yes Bank were written down in March 2020 after the Reserve Bank of India initiated a restructuring of the lender with some value attributed to the bank’s equity.

Despite the YES Bank precedent, Indian banks have raised AT-1 bonds at 65-75 basis points premium over government bonds, Citi said.

Banks AT-1 capital Risk-weighted AT-1 capital (In billion assets (In as % of RWA rupees) billion rupees) Private Banks HDFC Bank 123 15,363 0.80% ICICI Bank 51 10,414 0.50% Axis Bank 48 7,953 0.60% IndusInd Bank 15 3,225 0.50% YES Bank — 2,441 0% State-run banks State Bank of 415 26,940 1.50% India Canara Bank 124 5,573 2.20% Punjab 87 6,361 1.40% National Bank Bank of India 29 3,406 0.80% Indian Bank 20 3,227 0.60% Source: Jefferies India’s state-run banks have a higher share of AT-1 bonds as compared to private banks, according to Jefferies.

Since the Yes Bank episode, the issue of such papers has slowed as investors leaned towards larger, high-quality banks, it said.

“Among banks, top-3 issuers are SBI, HDFC Bank and Canara Bank with PSU (Public Sector Undertaking) banks having higher contribution from this,” the Jefferies report said, adding that smaller banks have a lower contribution from AT-1 bonds. “Local bond market investors aren’t really seeing risks here for Indian stocks.”

However, the state-run banks’ common equity Tier-1 capital ratios are low and a weak AT-1 bond market could necessitate equity capital raising, particularly in the case of the State Bank of India, Macquarie analysts said on Tuesday.

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