Additional Tier I (AT-I) bond issuances by banks are expected to stay robust at over ₹20,000 crore in FY23, while declining from an all-time high of ₹42,800 crore in FY22, according to ICRA.

The credit rating agency estimated that net of new offerings and redemptions, banking system’s AT-I bonds outstanding are projected to rise to ₹1.1 lakh crore by March 31, 2023.

With ₹20,000 crore in estimated issuances throughout FY23 and ₹9,400 crore in predicted redemptions during August-March 2023, the AT-I bonds outstanding are expected to reach ₹1.1 lakh crore by March 31, 2023, per ICRA’s assessment.

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Anil Gupta, Vice President, ICRA said: “Public sector banks are expected to raise ₹20,100 crore in AT-I bonds during FY23, but private sector issuances are expected to remain modest depending on market opportunities.

“Unlike in FY22, when issuances were mostly driven by rollover requirements, issuances by public banks in FY23 are primarily driven by growth requirements.”

AT-I bond issuances in FY22 were driven by the refinancing obligations of issuances in FY17 as majority of these bonds include a call option in the fifth-year.

Improved investor appetite

ICRA noted investors’ desire for AT-I bonds of public sector banks (PSBs) has been bolstered by their improved financial position and improved ability to service them after setting off of their accumulated losses against their share premium account.

The yields on recently issued AT-I bonds issued by PSBs ranged from 8.0 to 8.75 per cent, compared to 7.25 per cent on a five-year government bond and 7.55 per cent on a five-year AAA corporate bond, the agency said.

The coupon on the bonds issued recently is greater than the coupon on the bonds issued in FY22, but it is still lower than the rates on the bonds issued earlier in FY17 and FY18, it added. 

The agency estimated that private sector banks (PVBs) account for ₹18,000 crore of the ₹25,300 crore scheduled call option on AT-I bonds during FY23. The issuances from PVBs, if any, are unlikely to reach ₹5,000 crore.

Given the sizeable capital raise and comfortable capital position of the majority of the large PVBs, ICRA does not expect materially large issuances from these banks in the near term, despite the fact that the existing AT-I bonds are significantly lower in relation to their Risk-Weighted Assets when compared to PSBs.

The agency noted that overseas issuances are doubtful in FY23 due to elevated borrowing costs following a rapid increase in foreign currency benchmark rates, as well as tighter liquidity conditions globally.

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