2024-01-05 07:24:00
The diminishing appeal of perpetual bonds is likely to prompt India’s state-owned banks to turn to the equity market to raise funds in the coming months, five banking sources told Archyde.com this week.
Indian banks, including major lender State Bank of India, have raised regarding 87 billion rupees ($1.05 billion) through perpetual bonds since the start of the fiscal year, barely a quarter of fiscal 2023, with most of them struggling to raise even the targeted amount in auctions.
“With deposit rates rising, banks will have to pay a higher coupon on their debt securities, especially as mutual funds avoid investing in perpetual debt,” said a senior official at a large state bank.
In March 2021, markets regulator the Securities Exchange Board of India had said that the additional tier 1 bonds would be considered to have a deemed maturity of 100 years, starting from April 2023.
“This move literally ended mutual fund investments in these securities, making fundraising more difficult,” said a trader at a private bank.
Demand for these bonds declined further last year, following Credit Suisse wrote off regarding $17 billion of its additional Tier 1 debt as part of its rescue merger with UBS.
“It is possible that banks will resort more to the equity route to raise funds, as valuations will further improve, while it has become difficult to raise significant amounts with AT-I bonds,” said another banker.
The sources asked to remain anonymous because they were not authorized to speak to the media.
Last month, state-run lenders Bank of India and Indian Bank raised Rs 45 billion and Rs 40 billion respectively through qualified institutional placement (QIP) of shares.
A QIP raises funds by offering shares to qualified buyers without a public offering.
Union Bank of India had raised Rs 50 billion through a QIP in August.
Last week, Punjab National Bank approved raising a total of Rs75 billion through shares.
The Nifty PSU Bank Index grew by 32.30% in 2023, outperforming the Banking Index and the Financial Services Index.
“State banks have cleaned up their balance sheets well and their valuations are still discounted,” said Vinod Nair, head of research at Geojit Financial Services.
($1 = 83.1650 Indian rupees) (Reporting by Siddhi Nayak and Dharamraj Dhutia; Editing by Swati Bhat and Varun HK)
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