AT1 bond issuances is likely to fall over 50% in FY23 to Rs 20,000 cr: ICRA

Additional Tier 1 (AT1) bond issuances is likely to be less than half in FY23 compared to previous year, according to ratings agency ICRA. AT1 bond issuances are likely to fall sequentially to around Rs 20,000 crore in FY23, from an all-time high of nearly Rs 42,800 crore in FY22, it said.

AT1 bonds are a type of perpetual debt instrument that banks use to augment their core equity base and thus comply with Basel III norms. These bonds were introduced by the Basel accord after the global financial crisis to protect depositors. These are relatively risky as investors – mostly institutional players – may lose their entire capital as happened in case of Yes Bank in 2020.

ICRA said since the majority of these bonds include a call option in the fifth year, the issuances in FY22 were driven by the refinancing obligations of issues in FY17. While issuances were robust in FY2018, at Rs 34,400 crore, a significant number of them have already been refinanced in FY22, as the low interest rate environment provided banks with attractive possibilities to refinance these bonds at significantly reduced rates.

“Public sector banks are expected to raise Rs 20,100 crore in AT1 bonds during FY23, but private sector issuances are expected to remain modest depending on market opportunities,” said Anil Gupta, Vice President, ICRA . “Unlike in FY22, when issuances were mostly driven by rollover requirements, issuances by public banks in FY23 are primarily driven by growth requirements.”