PSU banks wary of SBI’s dismal AT-1 bond issue, may delay fund-raising

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Disappointing subscription to State Bank of India (SBI)additional Tier 1 (AT-1) bond issuance Thursday dampened market sentiment and is expected to make fundraising more difficult for other PSU banks, leading to delays in some cases.

On Thursday, the SBI raised ₹3,101 crore on an issue of ₹10,000 crore. AT-1 Bonds had a base issue of ₹3,000 crores and received total bids of ₹5,920 crores.

“wet feelings”

This certainly dampened investor sentiment. While the SBI might feel okay restricting the coupon to 8.1 percent, unfortunately, being the number one issuer for FY24 and SBI being the lead of all PSU banks, it weighed on market sentiment. “Investors feel they are not getting the real value or the coupon of the AT-1 bond,” said Venkatakrishnan Srinivasan, Founder of Rockfort Fincap.

The SBI raised funds at 8.1 percent, 91 basis points higher than the return on the 10-year G-second benchmark, and against bids received in the 7.90-8.42 percent range.

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A spread of less than 100 basis points in the current volatile market, combined with the huge issue size and the 10-year call option, doesn’t seem to do well with investors, especially given that the SBI is considered the benchmark. Market participants said this reflects banks continuing to misjudge the risk-reward ratio of the AT-1 bond.

“AT1 instruments absorb losses, so investors are likely to expect a higher return against this risk. The potential for losses being imposed on AT-1 for state banks is low, but still,” said Saswata Guha, senior director of financial institutions at Fitch Ratings India. It is a risk, should such a situation arise.

Cautious approach

There are plenty of other PSU banks out there, such as Punjab National BankAnd Canara BankAnd Bank of Barodawhich either has the necessary approvals or is forging bonds, may now “wait and see” to assess whether the market will rebound, look to offer higher prices, or delay fundraising by a few weeks or months.

Also read: SBI has been awarded an AA/Stable rating by CRISIL

“Other PSU banks will have to talk to investors before coming to the market; at least peg the size of the underlying issue and then come to the market instead of canceling the issue,” Srinivasan said, adding that they should look at the size of the issue based on market appetite and preference for a call option for a term. 5 years because the market expectation is definitely that rates will go up.

Market participants believe that a premium of at least 15-20 basis points over current prices will help price the AT-1 bond appropriately to take advantage of market appetite in the current market environment, which is already seeing some overcrowding in the long holding space, leading to price mismatches. .

“With interest rates expected to remain high at least this calendar year, investor expectations can remain high,” Guha said, adding that if investors have the option to invest in senior instruments at higher or similar rates, the incentive to invest in AT-1 bonds is less. .