SBI Raises Rs 5,000 Crore via AT1 Perpetual Bonds: What It Means for Investors
Source and Citation: Article published by ET Bureau in Economic Times on January 19, 2024.
Analysis for a Layman
The State Bank of India (SBI), the country’s largest lender, has successfully raised Rs 5,000 crore by issuing Additional Tier 1 (AT1) perpetual bonds. This move is aimed at strengthening the bank’s capital base to support credit growth in the economy.
AT1 bonds act as long-term capital for banks to meet regulatory requirements without shareholder dilution. However, they carry higher risk than traditional bank borrowings, being essentially perpetual in nature with variable coupon payouts. In distress situations, banks can restrict or even write off these coupon payouts before equity value erosion.
SBI offered an 8.34% annual yield on the fresh Rs 5,000 crore issue, attracting strong investor demand from mutual funds, insurers, and banks. It’s crucial for investors to be aware of the risks associated with AT1 bonds, as evidenced by global instances like Credit Suisse’s AT1 bonds being written off last year amidst its restructuring.
Impact on Retail Investors
For common investors holding SBI shares, the successful Rs 5,000 crore AT1 capital infusion benefits the bank’s growth capital needs, allowing it to expand its loan books without immediate dilution risks. It demonstrates investor appetite for bank capital offerings with reasonable certainty. However, retail investors need more awareness regarding the higher loss risks that AT1 bonds carry compared to traditional lending instruments.
RBI is expected to issue standardizing guidelines after the Credit Suisse episode highlighted contamination risks across bond categories. Until then, retail investors should consider restricting exposure to AT1 bonds due to layered risks over equity holdings in the same bank.
Impact on Industries
For India’s banking and financial services industry, sustained investor demand for risky AT1 bonds signals confidence in established names like SBI with a comfortable solvency track record. However, it also highlights the need for wider awareness of bond structure risks among institutional investors like mutual funds to ensure appropriate categorization, highlighting associated volatility.
With the Yes Bank AT1 bond write-off during the 2020 rescue still fresh, standardizing regulations are anticipated from RBI. Clarity is needed on contingency triggers and creditor hierarchy during wind-down scenarios. Implicit government backstops still seem assumed by investors chasing returns, risking moral hazards.
Long Term Positives & Negatives
Over the longer term, AT1 bonds offer banks immense capital flexibility to fund growth needs without immediate dilution or straining common equity. SBI has showcased that demand still exists provided the issuer has a strong position, enabling expanded lending horizons to support economic growth.
However, the opacity around risks requires mitigation to uphold investor trust and stability in bond categories. RBI needs to fix accountability regarding residual risks post early trigger breaches before writedowns. Undue reliance on AT1 instruments deteriorates the quality of bank balance sheets, amplifying solvency pressures during downturns.
Ensuring loss absorption parity across investor categories is debatable but vital as the quantum of such risky debt offerings rises.
Short Term Positives & Negatives
In the near term, SBI’s successful AT1 issuance signals investor comfort with established large-sized lenders to provide growth capital buffer liquidity. This sentiment uptick helps if more capital has to be mobilized to fund credit pickup, backing India’s economy without equity dilution pressures.
It also indicates money remains available at reasonable costs for strong banking names despite rising rate cycle risks. However, a lack of total clarity around inflexion points during capital erosion beyond contractual trigger breaches stays a concern, warranting policy attention. The risk of domino effects in downturns persists, requiring awareness enhancement around the vulnerability of such hybrid instruments.
While short-term growth orientation seems supported, resilience metrics need bolstering to uphold the stability of the banking system at large. Quick policy action is desirable to standardize the treatment of bonds with embedded risks across potential contractual breaches.
Potential Gainers and Losers from SBI’s AT-1 Bond Issuance
Indian Companies Likely to Gain:
- SBI: Successfully raising capital strengthens its long-term financial position and potentially improves credit rating, benefiting future fundraising and reducing cost of capital. Positive sentiment expected.
- Other Public Banks: SBI’s successful AT-1 issuance could pave the way for similar fundraising by other public banks like Indian Bank, Bank of Baroda, and Canara Bank, potentially improving their capital adequacy. Positive sentiment if they successfully follow suit.
- Indian Debt Market: Increased issuance and investor acceptance of AT-1 bonds could deepen the Indian debt market, offering more options for capital raising and diversification for companies and investors. Positive sentiment overall.
Indian Companies Potentially Impacted:
- Indian Investors Holding Existing AT-1 Bonds: The news of potential write-off of AT-1 bonds in case of financial distress could raise concerns among existing investors holding such instruments across various issuers. Negative sentiment for existing AT-1 bond holders.
- Indian Companies Looking to Issue AT-1 Bonds in the Future: The potential controversy surrounding AT-1 instruments might make their issuance more challenging for other companies in the near future, leading to increased borrowing costs or alternative fundraising methods.
Global Companies Likely to Gain:
- Global Investment Banks Acting as Underwriters: Successful placement of SBI’s AT-1 bonds could signal increasing acceptance of such instruments in India, potentially benefitting global investment banks like Citi, JP Morgan, and HSBC for future AT-1 bond issuances in the country. Positive sentiment for these banks.
- Global Investors with Appetite for High-Yield Debt: Successful AT-1 issuance might attract other global investors seeking high-yield debt instruments with potential risks, opening up a new investor segment for the Indian market.
Global Companies Potentially Impacted:
- Global Institutions with Negative View on AT-1 Bonds: Investors or institutions with negative past experiences or reservations about AT-1 instruments might avoid the Indian market due to this development, limiting potential investor pool and demand for future issuances.
Important Note:
This analysis is based on the provided information and current market conditions. It is not financial advice and investors should conduct their own due diligence before making any investment decisions.