Mumbai: State Bank of India (SBI) will raise $1 billion through a sale of dollar-denominated perpetual bonds to foreign investors, becoming the first Indian lender to sell such securities overseas, three bankers with knowledge of the matter said.

Technically called AT1, or additional tier-I bonds, the sale of the fixed income securities, which carry no maturity date, will help bolster SBI’s capital adequacy and help prepare the bank for a credit growth lift-off, whenever it happens.

“These bonds will be issued with a 5-year call option. The bank is yet to tie up with any individual investor for this issue," said the first of the three people cited above, an investment banker.

All three spoke on condition of anonymity, pending the start of the sale.

Perpetual bonds pay a coupon rate to investors for life. A call option allows the issuer (SBI in this case) to buy back its bonds after a lock-in period.

The bonds will be issued in at least two lots, with the first aimed at raising at least $500 million, said a second person, a senior SBI official.

“The timing is key in the market. Yields have come off a bit, while spreads are at the lowest level for Indian paper. We will be able to raise funds at a lower cost," said the third person, another senior SBI official.

The US Treasury benchmark yield dropped 18 basis points in the last three months to 1.55% on Tuesday on the back of weak US services data and lower probability of a Federal Reserve rate hike in September. One basis point is one-hundredth of a percentage point.

This bond sale will bolster SBI’s capital adequacy at a time when it is preparing for a merger with its associate banks—State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Patiala and State Bank of Hyderabad—and Bharatiya Mahila Bank.

Capital adequacy is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets.

At the end of the June quarter, SBI’s total capital adequacy ratio was 14.01%, compared with 12% a year ago. The share of AT1 capital was limited to 0.11% at the end of the first quarter.

In a report it issued in July, domestic rating agency India Ratings and Research said Indian banks would need Tier I capital worth 1.2 trillion over three financial years till 2018-19. This includes 40,000 crore in common equity tier 1 and 71,000 crore in AT1 bonds.

Most state-owned lenders in India are currently in the process of cleaning up their balance sheets of bad loans that have surged in the past year. Not only do bad loans lead to capital erosion, they also do not allow a bank to grow its overall business due to increased risk.

Indian banks are sitting on a 6.3-trillion pile of toxic assets and four out of 25 state-owned banks had capital adequacy ratios of less than 10%. Reserve Bank of India guidelines (based on the Basel III international norms) require Indian banks to have a total capital adequacy ratio of 10.25% at the end of this financial year.

The fund-raising committee of SBI on 24 August had approved raising 11,100 crore worth AT1 capital through a sale of Basel III-compliant perpetual debt instruments.

On Tuesday, SBI also privately placed AT1 perpetual bonds worth 2,100 crore with Yes Bank Ltd, at 9% per annum. Union Bank of India, too, raised 1,000 crore on 31 August at a rate of 9.5%, through private placement of AT1 bonds.

ALSO READ | SBI plans to raise Rs11,100 crore through AT-1 bonds

IDBI Bank Ltd on 30 August raised 1,500 crore through an AT1 issue, at a coupon rate of 11.06%.

Globally, there has been a lot of interest from high net worth individuals and sovereign wealth funds in AT1 bonds. These investments have a higher risk.

“Pricing and investor pool will be key" (to the success of the bond sale), said Karthik Srinivasan, senior vice president at ratings agency Icra Ltd.

Srinivasan flagged concerns about emerging risk in the AT1 bonds of various Indian banks in a report last month.

“The risk of servicing the coupon on some of these bonds has increased, should the profits of the current year be inadequate, as the accumulated distributable reserves have depleted significantly over FY2016 and Q1 FY2017," Srinivasan wrote in a note dated 22 August.

Close