Mutual Funds

AT1 exposure: MFs hold ₹28,000 crore in bonds issued by other banks, too

Radhika Merwin | Updated on March 12, 2020 Published on March 12, 2020

Watch the portfolio — large exposure to bonds of weak banks could spell trouble

The RBI writing down the additional tier 1 bonds (AT1 bonds) issued by YES Bank has investors worried. Debt mutual funds that parked money in YES Bank’s AT1 bonds have been hit hard, as they have to mark down their value to zero across all the schemes that hold these bonds.

The episode has also brought the exposure of mutual funds to AT1 bonds issued by other banks under focus. The current data available in Bloomberg for all active AT1 bonds suggest that of the outstanding AT1 bonds of about ₹1 lakh-crore, mutual funds and pension funds hold about ₹28,000 crore. About 164 schemes currently have exposure to AT1 bonds.

HDFC Mutual fund holds about ₹9,500 crore in AT1 bonds, ICICI Prudential AMC about ₹5,100 crore, SBI Funds Management about ₹3,100 core and Kotak Mahindra AMC about ₹2,400 crore. This data is as of March 11, and holdings reflect the market value of these bonds.

Aside from mutual funds, pension funds such as SBI Pension Fund and LIC Pension Fund also have exposure to AT1 bonds to the tune of ₹1,600 crore and ₹583 crore, respectively.


Across schemes and banks

Mutual funds currently have exposure to AT1 bonds issued by various banks, across several schemes. HDFC Mutual fund has exposure to 33 AT1 bonds across 19 schemes. It has parked money in AT1 bonds issued by SBI, HDFC Bank, BoB, ICICI Bank, Axis Bank, Canara Bank, PNB, Union Bank, Syndicate and Andhra Bank, among others.

ICICI AMC has exposure to 19 AT1 bonds across 14 schemes. A chunk of the fund’s investments are in bonds issued by SBI, Axis Bank and ICICI Bank.

Read also: AT-1 bonds: Have Indian rating agencies been less prudent than global counterparts?

Amit Bhosale, Head Risk Management at ICICI Prudential AMC, said the fund house has been investing in the AT1 issuance of specific banks after carrying out risk-return assessments. “That was the reason why we never invested in AT1 bonds issued by YES Bank. We have invested selectively in AT1 bonds issued by banks such as State Bank of India, Bank of Baroda, HDFC Bank and ICICI Bank, and are comfortable with these investments.”

SBI Mutual Fund has investments in 24 AT1 bonds across nine of its schemes, including bonds issued by SBI, ICICI Bank, Axis Bank, PNB, Andhra Bank, Syndicate Bank, BoB, SBI and Union Bank.

LIC Pension Fund has its total exposure to AT1 bonds split equally between its State government and Central government pension schemes. It has exposure to bonds issued by HDFC Bank, Canara Bank and SBI.

Don’t panic

However, investors with exposure to these funds should not panic. Private banks such as HDFC Bank, ICICI Bank, Axis Bank and IndusInd Bank, which have issued AT1 bonds, have adequate capital and are unlikely to run into trouble in the near future (based on their publicly available financials). While some of the PSU banks that have issued AT1 bonds have weak finances, the government backing by way of capital infusion (if required) offers some comfort.

However, after the YES Bank crisis, investors need to closely monitor the exposure of their funds to debt instruments. Avoid funds with a high concentration of such instruments. Also, AT1 bonds issued by banks are inherently risky as they can be written down or converted into equity if the issuers run into trouble. Hence, always keep a watch on the fund’s portfolio — it’s best to avoid those with a high exposure to bonds issued by weak banks.

Published on March 12, 2020

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