PSBs prepare to open AT-1, Tier-2 bond floodgates

Public sector banks (PSBs) have proposed the Finance Ministry their plan to raise Rs 54,800 crore through Additional Tier-1 (AT-1) and Tier-2 bonds in the current financial year (FY25), 37 per cent more than the Rs 39,880 crore raised in FY24, according to an internal document reviewed by Business Standard.

Both AT-1 and Tier-2  bonds are regulatory capital instruments used by banks to meet capital adequacy requirements under Basel III norms, but they differ in risk and structure.

AT-1 bonds, which lack a fixed maturity date, are considered higher risk as they can be written off during financial distress.

Despite this, they attract sophisticated investors seeking high yields.

In comparison,  AT-2  bonds are less risky, offering fixed maturity terms but lower yields.

So far in FY25, only State Bank of India (SBI) and Canara Bank have issued AT-1 bonds, raising Rs 5,000 crore and Rs 3,000 crore respectively.

In FY24, PSBs cumulatively had raised Rs 17,500 crore through AT-1 bond issuances.

Tier-2 bond issuances, on the other hand, have totalled Rs 23,500 crore in the current financial year (already 5 per cent higher than FY24 s full year Tier-2 bond figure), bringing the total raised through both instruments to Rs 31,500 crore.

The document reveals plans for AT1/AT-2  bond issuances in FY25. SBI and Punjab National Bank (PNB) aim to raise Rs 10,000 crore each, while Canara Bank plans cumulative issuances worth Rs 8,500 crore, and Bank of Baroda and Bank of India intend to issue Rs 7,500 crore each.

These figures include the amounts already raised by SBI and Canara Bank.

Additional issuances in FY25 are planned by Union Bank of India (Rs 4,000 crore), Bank of Maharashtra (Rs 2,500 crore), Indian Bank (Rs 2,000 crore), Central Bank of India (Rs 1,800 crore), and Indian Overseas Bank (Rs 1,000 crore).

Despite strong credit demand in the economy, the AT-1 bond market has seen limited activity this year due to high coupon rates and market caution, according to experts.

A significant catalyst for recent AT-1 activity was the Securities and Exchange Board of India s relaxation regarding mutual fund valuation of these instruments, which provided some relief to market participants.

While early movers like SBI and Canara Bank have enjoyed robust investor appetite and aggressive pricing, the broader market remains cautious, Venkatakrishnan Srinivasan, founder & managing partner, Rockfort Fincap.

Several banks are adopting a wait-and-watch approach, carefully analysing investor sentiment, yield expectations, and pricing dynamics before committing to issuance.

Srinivasan observed that banks appear more inclined toward infrastructure bonds this year, given their alignment with long-term lending objectives and favourable regulatory treatment.

As the financial year-end approaches, it remains to be seen whether the AT-1 bond market can regain its footing and close the gap with last year s issuance levels.

With Basel III compliance, CAR (capital adequacy ratio) optimisation, and economic tailwinds driving capital requirements, the next few months will be crucial in determining the trajectory of this segment,  he added.

A dealer at a state-owned bank noted that PSBs are cautiously re-entering the AT-1 bond market after a hiatus.

As the year-end nears, banks are exploring diversified funding options, including AT-1 bonds, alongside infrastructure bonds,  the dealer said.