Investors Total AT-1 Bond Exposure To Indian Banks At ₹93,000 Crore: ICRA

Investors have total bets of over ₹93,000 crore on the additional tier-I bonds in Indian banks and a complete write-down proposed in the Yes Bank restructuring may lead to risk aversion, according to a report by domestic rating agency ICRA.

The report comes two days after IndusInd Bank virtually dropped a plan for the issue of the AT-1 bonds by deferring a board meet following the Yes Bank package by the RBI, implementation of which is set to erode investments.

As part of the SBI-led restructuring package announced by the RBI, there is a proposal to write down the entire outstanding on AT-1 bonds, which has been pegged at ₹8,695 crore by ICRA on Monday. Investors have reportedly approached the banking regulator seeking help.

The proposal is “likely to further increase the risk aversion of investors as the investors will factor in a higher probability of write-downs on these bonds”, ICRA said in the report.

Appetite for future issuances and also the investor base for future issuances will take a beating because of the move, it said.

A total of ₹93,669 crore of AT-1 bonds is outstanding as on date (₹84,574 excluding Yes Bank), of which ₹39,315 crore will be in private banks (₹30,620 crore excluding Yes Bank).

The largest outstanding is with SBI at Rs 27,432 crore, followed by ICICI Bank at ₹10,120 crore, while the immediate call option is coming up for Bank of Baroda on a ₹400 crore bond, it said.

Most of these bonds were issued in 2016-17 and 2017-18 with first call option after fifth year from issuance, which means large bonds are due for call in 2021-22 and 2022-23.

The reduction in the risk appetite for investors will constrain banks from rolling over these bonds by exercising call option and fresh issuance, it said.

In such an event, and also the absence of fresh issuances, the capital buffers over regulatory levels will decline by an estimated 1 per cent of risk weighted assets, it said.

The agency added that under the large exposure framework, exposure to single borrower or group of borrowers is linked to tier-1 capital, and reduction in tier-1 capital upon redemption of these bonds will also reduce the ability of the banks to take large exposures to a borrower group.