S&P: Yes Bank Event Underlines Difference Between PSBs And Private Banks On AT1 Bonds

Global rating agency Standard and Poor’s has noted that the Yes Bank event has shaken Indian hybrid markets and has underlined the distinction between AT1 bonds issued by public sector banks, and those from privately owned lenders.

“The event has rattled India's bank hybrid markets--it's been a hot topic among local investors in the past week. A complete write-down would likely raise the risk premium that investors price into Indian hybrids," said S&P Global Ratings credit analyst Deepali Chhabria.

This would create losses for asset managers and raise capital costs for issuers, it further said.

Its comments come after private sector lender Yes Bank as part of its reconstruction plan decided to permanently write down Additional Tier I bonds worth Rs 8,415 crore leaving investors in a lurch.

S&P Global Ratings has also issued FAQs on its perspective on AT1 bonds in India and how it compares with other Asian markets.

The rating agency noted that under the Basel III framework, AT1 instruments are designed to be loss absorbing, meaning that holders of the debt might not get repaid in the event of financial stress. Indian regulations state that such instruments should absorb losses while the bank remains a going concern.

It further said AT1 bonds by domestic banks categorically provide that any capital infusion by the government into the issuer as the promoter of the issuer in the normal course of business may not be construed as a point of non-viability trigger.

Many public sector banks were allowed to exercise early call options for their AT1 instruments under what was deemed a "regulatory event", S&P said, adding that at the time.

“We took the view at the time that we were no longer certain that AT1s issued by public-sector banks would absorb losses on a going-concern basis, if needed, or become a permanent part of a bank's capital structure,” it said, adding that on the other hand, it has always maintained that the Indian regulator would not likely extend such flexibility to the private-sector banks.

"Events have supported this view. RBI's decision to permanently write down Yes Bank's AT1s is in line with our view that these instruments will absorb losses at private-sector banks, not public-sector banks," said Chhabria.