The underwhelming subscription to State Bank of India (SBI)’s additional tier-1 (AT-1) bond issue on Thursday has dampened market sentiment and is expected to make fund-raising harder for other PSU banks, even leading to delays in certain cases.

On Thursday, SBI raised ₹3,101 crore against an issue size of ₹10,000 crore. The AT-1 bonds had a base issue of ₹3,000 crore and received total bids worth ₹5,920 crore.

‘Dampened sentiment’

“This has definitely dampened investor sentiment. Even though SBI might feel okay restricting the coupon to 8.1 per cent, unfortunately, being the first issuer for FY24 and SBI being the leader for all PSU banks has hit market sentiment. Investors are feeling they have not got the real value or coupon for the AT-1 bonds,” said Venkatakrishnan Srinivasan, Founder, Rockfort Fincap.

SBI raised the funds at 8.1 per cent, 91 bps higher than the yield on the 10-year benchmark g-sec, and against bids received in the range of 7.90–8.42 per cent.

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A less than 100 bps differential in the current volatile market, combined with the huge issue size and the 10-year call option, does not seem to have gone down well with investors, especially given that SBI is considered the benchmark. This reflects that banks continue to misprice the risk-reward ratio for AT-1 bonds, market participants said.

“AT1 instruments are loss-absorbing, so it is possible investors expect a higher return against that risk. The probability of losses being imposed on state banks’ AT-1 is low, but it is still a risk nonetheless, should such a situation arise,” said Saswata Guha, Senior Director-Financial Institutions, Fitch Ratings India.

Cautious approach

A lot of the other PSU banks, such as Punjab National Bank, Canara Bank, and Bank of Baroda, which have either taken the necessary approvals or are lining up bonds, might now “wait and watch” to assess if the market will pick up, look to offer higher rates, or delay their fund raising by a few weeks or months.

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“Other PSU banks will have to talk to investors before coming to the market; at least tie up the base issue size and then come to the market instead of scrapping the issue,” Srinivasan said, adding that they should look at an issue size based on the market appetite and preference for a 5-year call option because the market expectation is definitely that the rates have gone up.

Market participants believe at least a 15-20 bps premium over the current rates would help AT-1 bonds be appropriately priced to tap market appetite in the current market environment, which is already seeing some overcrowding in the long-tenure space, leading to a pricing mismatch.

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