How banks made a mad dash for AT1 bonds in recent years

BL Research Bureau

Banks, both private and public, have been increasingly raising capital through additional Tier 1 bonds (AT1 bonds) in recent years. In fact, of the ₹1 lakh-odd crore outstanding AT1 bonds currently, about 66 per cent or ₹67,000 crore were issued by banks in just two years — 2016 and 2017. Interestingly, these issuances follow the sharp rise in banks’ bad loans post the RBI’s asset quality review in December 2015 and its annual risk-based supervision that led to huge bad loan divergences and losses.

It was also the time when the RBI relaxed norms under AT1 bonds, making it easier for banks to raise capital through that route. In 2018 and 2019, banks issued ₹12,000-13,000 crore each of AT1 bonds, constituting a fourth of the outstanding value on these bonds currently.

Top issuances

In 2016, top issuances in terms of value were by banks such as SBI ( ₹7,100 crore), Axis Bank (₹3,500 crore), Syndicate Bank (₹2,800 crore) and YES Bank (₹2,100 crore).

In 2017, bond issuances were led by banks such as HDFC Bank (₹8,000 crore), YES Bank (₹5,415 crore) ICICI Bank (₹5,000 crore), PNB (₹3,750 crore) and Axis Bank (₹3,500 crore).

Interestingly, YES Bank was among the top 5 banks that issued AT1 bonds in 2016 and 2017.

In 2018 and 2019, while the number of bond issuances tapered off, the amount raised by a few banks was sizeable. For instance, SBI raised ₹6,000 crore and about ₹8,100 crore in 2018 and 2019 respectively. ICICI Bank raised about ₹5,000 crore in 2018 while BOB raised about ₹3,400 crore in 2019.

Bad loan losses

Over the past four to five years, almost all banks have been grappling with weak credit growth, sharp rise in bad loans, weak earnings and eroding capital. In FY16, for instance, SBI saw a 50 per cent rise in bad loan provisions and 24 per cent dip in net profit. In FY18, the first fiscal after SBI’s merger with its five associate banks, the bank reported net loss of about ₹6,500 crore and slippages of a whopping ₹95,000 crore.

The state of affairs at other PSU banks has been more dismal, leading to huge capital infusion by the Centre too. In FY18 and FY19, listed PSU banks, put together, reported ₹76,000 crore and ₹57,000 crore of losses respectively. The Centre has infused a massive ₹2.7 lakh crore over the past three years into PSU banks. Despite the Centre’s largesse, many PSU banks appeared to have made a beeline for AT 1 bond issuances too, to meet their capital requirements.

Many private banks have also been in a sticky spot over the past few years. Axis Bank had witnessed a sharp rise in bad loans and steep erosion in earnings in FY17 and FY18. ICICI Bank had also witnessed a sharp rise in stressed assets and provisions during this period. The fast deteriorating financials of YES Bank are now well-documented.

Given the erosion in earnings and capital, many banks have been relying increasingly on AT1 bonds to meet their capital needs.

RBI tweaks

The RBI relaxing certain norms on AT1 bonds in recent years has also nudged banks to take the route. In 2016, the RBI allowed banks to pay coupons out of past profits and revenue reserves if current year profits were not sufficient (provided the bank meets the minimum capital requirements). Subsequently, in 2017, it also allowed banks to pay coupons out of statutory reserves. Earlier (in 2014), the RBI had also lowered the call option period — giving banks the discretion to buy back the bonds within five years of issuance instead of 10. All of this made it easier for banks to raise capital through the AT1 bond route.

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