The Additional Tier (AT)-1 bond market has polarised towards large/quality banks post the writedown of these bonds aggregating ₹8,415 crore by Yes Bank in the fourth quarter of FY20, according to Jefferies.
This observation comes in the backdrop of UBS’ acquisition of the troubled Credit Suisse entailing a write-down of the latter’s AT-1 bonds aggregating $17.2 billion.
Explained: How will the Credit Suisse crisis impact India?
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“India had a Credit Suisse-like AT-1 bond issue right around Covid when Yes Bank wrote-down AT-1 bonds and still there was some franchise value assigned to equity through capital infusion by leading banks/ NBFC.
“Since then, the issuances have been lower and market has become polarised towards larger/ quality banks,” Brokerage firm Jefferies said in a report.
Top contributors
Among banks, the top three issuers are the State Bank of India (SBI), HDFC Bank, and Canara Bank with public sector banks (PSBs) having higher contribution from this.
PSBs have a higher share of AT-1 bonds in capital structure compared to private sector peers, Jefferies said.
Among PSBs, SBI had AT-1 capital of ₹41,500 crore, followed by Canara Bank (₹12,400 crore), Punjab National Bank (₹8,700 crore), Bank of India (₹2,900 crore), and Indian Bank (₹2,000 crore), the firm said.
Among private sector banks, HDFC Bank had AT-1 capital of ₹12,300 crore, followed by ICICI Bank (₹5,100 crore), Axis Bank (₹4,800 crore), IndusInd Bank (₹1,500 crore), and Kotak Bank (₹500 crore)
“Interestingly, smaller banks have a lower contribution from AT-1 bonds. Local bond market investors aren’t really seeing risks here for Indian stocks,” Jefferies said.
‘Better-placed’
The report observed that Indian financials (banks and NBFCs) have also borne the rub-off effect of global dislocations. But, they are better placed with a higher share of retail deposits, limited ALM (asset-liability mismatch) gap & MTM (mark-to-market), limited dependence on AT-1 bonds, and lower exposure to riskier segments like promoter/acquisition finance.
While equities and global bonds saw pressure off late, the local bond market is stable. Post correction, valuations of some are near/below Covid lows, the firm said.