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Thursday, November 25, 2021

FOCUS: Fearing rise in borrowing cost, PSU banks rush to bond market

Informist, Thursday, Nov 25, 2021

By Subhana Shaikh


MUMBAI – Ahead of the Reserve Bank of India’s monetary policy review early next month, public sector banks are making a beeline for the debt market, fearing higher cost of borrowing.


Like other central banks around the world, the RBI is widely expected to withdraw the emergency-level monetary accommodation that it had extended at the peak of the COVID-19 pandemic. In fact, it is said to have already embarked on the path of normalisation in the last two policy reviews, announcing higher liquidity absorption through reverse repo operations.


“Most PSU banks are planning to come with tier-I bonds now,” said Dwijendra Srivastava, executive vice president and chief investment officer – debt at Sundaram Asset Management Co. “If you look at the time they’re coming into, it has coincided with the expectation of interest rates moving up.


“The cut-offs set by the RBI in its recent variable reverse repo rate auctions are indicating that the central bank is definitely looking to hike reverse repo rate. While we will know about the quantum in the policy, it is clear enough that they want to normalise rates.”


Two weeks ago, Informist had exclusively reported that State Bank of India, Canara Bank, Bank of Baroda, and Union Bank of India planned to step into the debt market through additional tier-I bonds by this month.


Last week, Union Bank of India raised 20 bln rupees through Basel-III compliant tier-I bonds at a coupon of 8.70%. On Wednesday, Bank of Baroda raised 19.97 bln rupees through tier-I bonds at a coupon of 7.95%.


With inflation seen rising further and the COVID-19 pandemic abating, treasury officials from most banks expect the RBI to raise the reverse repo rate by 15-40 basis points when the central bank releases its monetary policy statement on Dec 8. An increase in the reverse repo rate, the operative policy rate for over a year now, will push up the cost of funds and, by extension, bond yields.


“…we expect market tightening in Jan-Mar, so it makes sense to try and do it soon when there are investors on the table,” said a senior official from one of the banks above-mentioned earlier.


SBI, which serves as a benchmark for other state-owned banks, is looking to issue tier-I bonds at a coupon of 7.65%, while Canara Bank is targeting a coupon in the range of 8.15-8.30%, sources said. 


Currently, similar bonds are being quoted at 7.61-8.72% in the secondary market for corporate bonds.


Another factor that seems to have prompted the flurry of tier-I bond offerings is the strong demand elicited by SBI’s latest tranche of perpetual bonds on Oct 13. The country’s largest public sector lender had raised 100 bln rupees through the issue of two additional tier-I papers at a coupon of 7.72%.


Canara Bank, the only other bank to have sold perpetual bonds this financial year, raised 15 bln rupees at a coupon of 8.40% last month.


According to merchant bankers, demand for these papers came from wealth management companies, some big corporates, and a few traders. Certain institutional investors other than mutual funds have also been looking to invest in perpetual bonds to avail the high returns on these securities.


“…demand is meeting with reasonable appetite from investor fraternity because these bonds are giving good carry,” said Lakshmi Iyer, chief investment officer – debt at Kotak Mahindra Asset Management Co.


Banks have been looking to tap into the domestic investor appetite while it is still strong, given that international bond markets have turned risk-averse because of heavily indebted Chinese developer Evergrande being on the verge of a default for the last few months.


Earlier this year, some private banks, including HDFC Bank and Axis Bank, had successfully tapped the offshore borrowing route with additional tier-I bonds to raise substantial amounts.


“Honestly, Union Bank of India wanted to raise funds via offshore, but all advisors said that those markets have no appetite or have tightened due to Evergrande. Thankfully, domestic markets have picked up, so the option is there to tap locally,” said the senior bank official.


But even though the initial demand for tier-I bonds in the domestic market has been fairly robust, subsequent issuances might not find as many ready takers, given that mutual funds are unlikely to invest in these papers. This comes after the new rules for valuation of tier-I bonds took effect in March, making the mutual fund industry turn risk-averse towards these papers.


In March, the Securities and Exchange Board of India had directed mutual funds to value tier-I bonds as 100-year instruments, a departure from the existing practice of considering the date of the call option, typically around 10 years from the date of issuance.


The market regulator has since given fund houses time until April 2023 to value these bonds. It has mandated that the residual maturity for valuing tier-I bonds by fund houses would initially be 10 years. This would change to 20 years for valuation completed between April 2022 and September 2022, and to 30 years for the next six months.


Arrangers say perpetual bond offerings with a size of 10-20 bln rupees will sail through, but a larger issue size is unlikely to meet with success because existing investors such as wealth management companies can absorb only so much worth of supply.


Although state-owned banks may comfortably raise funds through tier-I papers at this point, the demand for these bonds may be short-lived unless institutional investment gets fully restored. 


At 1300 IST, shares of SBI were down 0.2% at 492.95 rupees, while those of Union Bank of India and Bank of Baroda were down 0.9-1% at 45.85 and 92.45 rupees, respectively. Shares of Canara Bank were 0.5% higher at 214.45 rupees on the National Stock Exchange.  End


IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Avishek Dutta


Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.


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Source: Cogencis

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