SBI Raises Rs.5,000 Crore Through AT-1 Bonds to Strengthen Capital Base, Understand what this means
India’s largest bank, State Bank of India (SBI), successfully raised ₹5,000 crore on Wednesday by issuing Additional Tier-1 (AT-1) bonds. The bonds were issued at a coupon rate of 7.98%, which is the interest rate the bank will pay to its investors. This move is aimed at strengthening SBI’s capital reserves and marks the bank’s first such bond issuance in the current financial year.
What Are AT-1 Bonds?
AT-1 bonds are special debt instruments that banks use to raise money and improve their capital base. These bonds are perpetual, meaning they have no fixed maturity date, but SBI has the option to call, or redeem, them after 10 years. However, these bonds come with some risks. If the bank’s capital falls below certain levels or it faces financial difficulties, the interest payments on these bonds could stop, or the bonds might even be converted into shares.
Strong Investor Interest
The bond issue had a base size of ₹2,000 crore, but SBI also included a “greenshoe option,” allowing it to raise an additional ₹3,000 crore, bringing the total to ₹5,000 crore. The issue received an overwhelming response from investors, with bids coming in at more than 3.5 times the base issue size. SBI received 108 bids from a range of investors, including provident and pension funds, insurance companies, mutual funds, non-banking financial companies (NBFCs), and banks.
SBI Chairman C. S. Setty expressed his satisfaction with the broad participation, stating that it showed the trust investors have in the country’s largest bank.
How This Issue Compares
The 7.98% coupon rate for this bond issue is lower than the 8.34% rate SBI offered in its last AT-1 bond issuance in January 2023, which also raised ₹5,000 crore. Experts in the market noted that this lower rate reflects the easing of government bond yields, which have dropped by over 30 basis points since April. As a result, the cost of raising funds for banks has become more affordable.
Capital Requirements and Basel-III Compliance
These AT-1 bonds are designed to comply with Basel-III regulations, which are international banking standards created to help banks better handle financial stress. SBI, like other banks, must keep a certain level of capital to cover its risks, and issuing AT-1 bonds is one way to meet these requirements.
As of June 30, 2024, SBI had a capital adequacy ratio of 13.86%, down 70 basis points from the previous year. Its Common Equity Tier-1 (CET-1) ratio stood at 10.25%. To maintain a healthy capital base, SBI has already raised ₹15,000 crore this year through Basel-III compliant Tier-II bonds.
Other Banks Follow Suit
SBI isn’t the only bank raising funds. Indian Bank, a state-owned bank, is also planning to raise up to ₹5,000 crore through 10-year infrastructure bonds. The issuance, set for Thursday, has a base size of ₹2,000 crore with an option to increase by ₹3,000 crore. These bonds have been rated ‘AAA’ by Care Ratings and Crisil, reflecting their low risk. In September, Indian Bank raised ₹5,000 crore through 10-year bonds at an interest rate of 7.24%.
Conclusion
SBI’s ₹5,000 crore AT-1 bond issuance highlights the bank’s efforts to bolster its capital base while taking advantage of favorable market conditions. With strong investor interest and a competitive interest rate, SBI continues to solidify its position as India’s leading bank, while other banks like Indian Bank are also moving to strengthen their financial foundations through bond issues.
