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The Additional Tier (AT)-1 bond market has polarised towards large/quality banks post the writedown of these bonds aggregating ₹8,415 crore by Yes Bank in the fourth quarter of FY20, according to Jefferies.
This observation comes in the backdrop of UBS’ acquisition of the troubled Credit Suisse entailing a write-down of the latter’s AT-1 bonds aggregating $17.2 billion.
“India had a Credit Suisse-like AT-1 bond issue right around Covid when Yes Bank wrote-down AT-1 bonds and still there was some franchise value assigned to equity through capital infusion by leading banks/ NBFC.
“Since then, the issuances have been lower and market has become polarised towards larger/ quality banks,” Brokerage firm Jefferies said in a report.
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Among banks, the top three issuers are the State Bank of India (SBI), HDFC Bank, and Canara Bank with public sector banks (PSBs) having higher contribution from this.
PSBs have a higher share of AT-1 bonds in capital structure compared to private sector peers, Jefferies said.
Among PSBs, SBI had AT-1 capital of ₹41,500 crore, followed by Canara Bank (₹12,400 crore), Punjab National Bank (₹8,700 crore), Bank of India (₹2,900 crore), and Indian Bank (₹2,000 crore), the firm said.
Among private sector banks, HDFC Bank had AT-1 capital of ₹12,300 crore, followed by ICICI Bank (₹5,100 crore), Axis Bank (₹4,800 crore), IndusInd Bank (₹1,500 crore), and Kotak Bank (₹500 crore)
“Interestingly, smaller banks have a lower contribution from AT-1 bonds. Local bond market investors aren’t really seeing risks here for Indian stocks,” Jefferies said.
‘Better-placed’
The report observed that Indian financials (banks and NBFCs) have also borne the rub-off effect of global dislocations. But, they are better placed with a higher share of retail deposits, limited ALM (asset-liability mismatch) gap & MTM (mark-to-market), limited dependence on AT-1 bonds, and lower exposure to riskier segments like promoter/acquisition finance.
While equities and global bonds saw pressure off late, the local bond market is stable. Post correction, valuations of some are near/below Covid lows, the firm said.
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