Informist, Wednesday, Aug 28, 2024

By Sachi Pandey

MUMBAI – Canara Bank's issuance of Basel-III compliant tier-I bonds on Tuesday was the first offering of such papers in the current financial year, and the fact that it sailed through would be an encouraging sign for other banks looking to raise capital through the instrument. However, the bond sale succeeded mostly because of reasons specific to it, and had little help from the recent revision in the valuation methodology of these instruments, dealers said.

On Tuesday, Canara Bank raised 30 bln rupees through tier-I bonds, at a coupon of 8.27%. The issue, with a call option at the end of five years from the date of allotment, was fully subscribed. The coupon was slightly lower than the 8.30-8.40% range predicted by the market, although sources said the bank had targeted an even lower band of 8.15-8.25%.

The bank received around 96 bids worth 46.58 bln rupees at a range of 7.95-8.47%, according to a bid book accessed by Informist. Notably, bids for 10 bln rupees, the base size of the issue, were received by the bank at a coupon of 8.19%.

"Being among the early/first issuers of AT1 bonds this fiscal year has its advantages, as demonstrated by Canara Bank, which secured tighter pricing," said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. "However, as more issuers enter the market, this benefit is likely to diminish, given the limited investor appetite for AT1 (tier-I) bonds at present."

To maximise demand, Canara Bank had advanced the issuance date to Aug 27 from Aug 28, avoiding potential competition with other issuers in a supply-heavy week, sources said.

Although the issuance saw strong demand from long-term investors, particularly insurance companies and pension funds, limited participation from mutual funds indicated that the latest valuation guidelines have not been a game changer.

On Aug 5, the Securities and Exchange Board of India issued new guidelines allowing mutual funds to value their additional tier-I bond holdings as per the bond's call option date, or yield-to-call, instead of the earlier requirement of valuing these as 100-year securities. While this change limits the potential portfolio hit in the event of a rise in yields, the regulator has mandated that the duration of these papers would continue to be counted as 100 years.

"For mutual funds, the new guidelines primarily impact valuation," said Laukik Bagwe, fixed income vice-president at DSP Mutual Fund. "The average maturity and duration of the specific instrument remain long, with no significant changes. So, while the valuation is now based on the call option, there is not a major shift in duration, average maturity, or how the instrument is calculated. But it's worth noting that outside of mutual funds, there has been a decent level of demand (for Canara Bank) in the market."

A closer look at the pricing of Canara Bank's bond also shows that there has not been a dramatic improvement in investor appetite. The coupon was 138 basis points higher than the annualised yield on the five-year benchmark government bond. The last time Canara Bank tapped the bond market with a perpetual bond was in February, when it raised 20 bln rupees at a coupon of 8.40%, 122 bps above the benchmark yield.

Before Tuesday, the last lender to tap the market with tier-I bonds was Punjab National Bank, which locked in slightly better pricing, but managed to raise only 18.59 bln rupees in March. The bank shelled out a coupon of 8.47%, around 128 bps above the five-year benchmark yield.

Whether or not the new valuation norms helped, the encouraging response to Canara Bank's perpetual bonds raises hope that other banks' perpetual bonds may also be met with strong investor appetite. However, some dealers were sceptical, pointing out that the others wouldn't have the first mover advantage that Canara Bank had. The inherently risky nature of perpetual bonds might remain a concern for investors, especially after the write-down of YES Bank's tier-I bonds in 2020, they said.

"Demand is there because supply is limited. Not all banks will raise funds through perpetual bonds," a source at a brokerage firm said. "When they (banks) do an infra (infrastructure) bond, they are like tigers, but when they do an AT-I (tier-I) bond, they are like kittens. For tier-I bonds, it is a seller's market, it is a marketing move and Canara Bank did a fantastic job marketing their issuance."

Looking ahead, other large public sector banks are reportedly preparing to follow Canara Bank's lead.

State Bank of India, the country's largest lender, is expected to hit the market with tier-I bond offerings soon to meet its funding requirements. Earlier this month, Informist had exclusively reported that State Bank of India was likely to raise funds through perpetual debt in September. However, the details have not been finalised yet.

On Tuesday, shares of Canara Bank closed 0.5% lower at 110.85 rupees on the National Stock Exchange. End

Edited by Avishek Dutta

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