AT1 bond issuances likely to fall to around Rs 200 billion in FY2023: ICRA

"Public sector banks are expected to raise Rs 201 billion in AT-I bonds during FY2023, but private sector issuances are expected to remain modest depending on market opportunities. Unlike in FY2022, when issuances were mostly driven by rollover requirements, issuances by public banks in FY2023 are primarily driven by growth requirements," said Anil Gupta, Vice President, ICRA.

The additional tier 1 (AT1) bond issuances are likely to fall sequentially to around Rs 200 billion in FY2023, from an all-time high of nearly Rs 428 billion in FY2022.

The issuances were higher in FY22 as most were driven by refinancing obligations of issue in FY17.

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Net of new offerings and redemptions between April and July 2022, the AT-I bonds outstanding on July 31 were Rs 1.02 trillion. With approximately Rs 200 billion in estimated issuances throughout FY2023 (of which Rs 53.2 billion was issued in 4MFY2023) and Rs 94.0 billion in predicted redemptions during August-March 2023, the AT-I bonds outstanding are expected to reach around Rs 1.1 trillion by March 31, 2023.

"Public sector banks are expected to raise Rs 201 billion in AT-I bonds during FY2023, but private sector issuances are expected to remain modest depending on market opportunities. Unlike in FY2022, when issuances were mostly driven by rollover requirements, issuances by public banks in FY2023 are primarily driven by growth requirements," said Anil Gupta, Vice President, ICRA.

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Investors' desire for AT-I bonds of public banks 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.

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The yields on recently issued AT-I bonds issued by public banks 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 coupon on the bonds issued recently is greater than the coupon on the bonds issued in FY2022, but it is still lower than the rates on the bonds issued earlier in FY2017 and FY2018.

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Private banks account for Rs 180 billion of the Rs 253 billion scheduled call option on AT-I bonds during FY2023 (Rs 73 billion by public banks). The issuances from private banks, if any, are unlikely to reach Rs 50 billion.

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