There was much elation about SBI’s maiden dollar AT-1 or Additional Tier-1 bonds issue. Additional Tier-1 instruments can be defined as bonds having equity-like perpetual existence, but they pay a regular fixed coupon also like any other debt instrument. These hybrid bonds allow banks to raise vital Tier-1 capital and cannot be more than 2 per cent of their total capital base.
The success of SBI in raising money comes at a time when the public sector banks are in sheer need of Tier-1 capital and a few are even on the edge of slipping below the regulatory minimum of 7 per cent under Basel-III norms.
However, just like you don’t get a loan when you need it the most, banks hamstrung by their capital are unlikely to get eager investors for their perpetual AT-1 bonds.Their credit score is very low in the eyes of offshore investors.
Firstly, most of the twenty one listed public sector lenders, not considering the SBI group, have gross non-performing assets (NPAs) exceeding 10 per cent of their total loan book. They have been loss-making banks also for FY16. The net interest income or the core income that a bank earns, grew at a measly 3.2 per cent in the quarter ended June at a cumulative level for all these lenders. With these performance metrics kept as reference, the investors would probably baulk at taking not just long-term view but also a near-eternity view on a debt instrument.
Secondly, these banks which are loss-making are also facing a faster depletion of their distributable reserves, which are utilised to make interest payments on Additional Tier-1 bonds. Hence, the risk to servicing of these bonds is fairly high. And a third deterrent to the investors would be the rating itself. State Bank of India’s dollar AT-1 bonds are rated B1(hyb) by Moody’s Investors Service, 2 notches below its baseline credit assessment rating of ba1, due to the nature of the debt instrument. Other banks might end up with a rating for their AT-1 bonds which is even lower.
The investors shall naturally ask for higher compensation to purchase AT-1 bonds of other banks. Indeed, to bring down the coupon to 5.5 per cent, SBI had to settle for a lower mop-up via its issue. The bank raised 300 million dollars against the original 500 million dollars. Other banks will have to price their Additional Tier-1 bonds dearer to attract investors.
Meanwhile, SBI share price was trading 2.01 per cent higher at Rs.254 on the NSE today. The stock opened at Rs.250 from a previous closing of Rs.249.
Senior vice-president and co-head (financial sector ratings) – Karthik Srinivasan, at Icra Limited, in a note dated 15th September, warned that risks associated with Additional Tier-1 bonds are higher than the other instruments. He said that these bonds were perpetual in nature and the option to repay laid only with the bank issuing the bonds while the investors had to depend on the secondary market for an exit.
And perhaps this is the most vital. Since Additional Tier-1 bonds had no precedence, investors did not have a handle on the secondary market liquidity. In spite of these odds, SBI has opened doors to the offshore market. However, as things stand, it seems like its peers will not get even a toehold in this novel segment.
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