Comments
Investor appetite for future issuances of Additional Tier-I (AT-1) bonds make take a hit following the proposed write-down of AT-I bonds as part of YES Bank’s restructuring plan. This could also result in the contraction of the investor base in these bonds, as many would seek to avoid these bonds in future, according to credit rating agency ICRA.
Related Stories
Why investors in Yes Bank AT 1 bonds should not cry wolf now
These bonds have always been inherently risky and could be written down on pre-specified trigger and at the point of non-viabilityThe restructuring plan of YES Bank is likely to further increase the risk aversion of investors as they factor in a higher probability of write-downs on these bonds, the agency said.
Further, equity capital requirements for banks could increase as risk aversion for AT-I bonds will likely rise.
As per ICRA’s estimates, a total of ₹93,669 crore of AT-I bonds is outstanding as on date (₹84,574 excluding YES Bank), of which ₹39,315 crore are of private banks (₹30,620 crore excluding YES Bank).
Most of these bonds were issued during FY2017 and FY2018 with the first call option after the fifth year from issuance. As a result, large bonds are due for call in FY2022 and FY2023.
Amid the risks emerging from the recent event, ICRA expects investor appetite for future issuances of AT-I bonds to reduce, thereby constraining banks from rolling over these bonds by exercising the call option and fresh issuances.
“Given the expected increase in risk premium for these bonds, banks have incentive to not exercise the call option, given the lucrative rates at which the past issuances (have happened).
“However, a decision to not exercise a call option may see a backlash from investors, who have invested in these bonds from a five-year perspective, and impact their future fund-raising activities,” ICRA said in a presentation.
In FY18, public sector banks (PSBs) issued AT-1 at 9 per cent (on an average), 9.50 per cent in FY19, and 8.70 per cent in FY20. In FY18, private sector banks (PvSBs) issued AT-1 at 8.90 per cent (on an average), 10.30 per cent in FY19, and 13.80 per cent in FY20.
The agency assessed that capital cushions over regulatory levels will decline by an estimated 1 per cent of risk weighted assets (RWAs) in case they are unable to replace them with fresh issuances or AT-1 issuances.
Under large exposure framework, the exposure to a single borrower or a group of borrowers is linked to Tier-I capital. So, reduction in Tier-I capital upon redemption of these bonds will also reduce the ability of banks to take large exposures to a borrower group, ICRA said
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.