Indian state-run banks may look to equity fundraising as perpetual bonds lose sheen

Bank Of India

05/01/2024 07:17

By Siddhi Nayak and Dharamraj Dhutia
       MUMBAI, Jan 5 (Reuters) - 
    Diminishing lure for perpetual bonds is likely to prompt
Indian state-run banks switch to the equity market for raising
funds in coming months, five banking sources told Reuters this
week.
  
        Indian banks, including top lender State Bank of India,
have raised around 87 billion rupees ($1.05 billion) through
perpetual bonds so far this fiscal, just about a quarter of
fiscal 2023, with most struggling to raise even the targeted
amount at auctions.
  
    "With deposit rates inching higher, banks will have to pay a
higher coupon on their debt securities, especially with mutual
funds staying away from investing in perpetual debt," a senior
official at a large state-run bank said.
    Market regulator Securities Exchange Board of India had in
March 2021 said that additional Tier 1 bonds would be considered
to have a deemed maturity of 100 years, starting April 2023.
    "This move has literally ended mutual fund investments in
such papers, making fundraising more difficult," a trader with a
private bank said.
        Demand for these bonds fell further last year, after
Credit Suisse wrote off around $17 billion of its additional
Tier 1 debt amid its rescue merger with UBS.
    "There is a possibility that banks may tap the equity route
more for fundraising as valuations will improve further, while
getting large quantum with AT-I bonds has become difficult,"
another banker said.
        The sources asked to remain anonymous as they were not
authorised to speak to the media.
    Last month, state-run lenders Bank of India  BOI.NS  and
Indian Bank  INBA.NS  raised 45 billion rupees and 40 billion
rupees, respectively, via qualified institutional placement
(QIP) of shares.
    A QIP enables fundraising by offering equity shares to
qualified buyers without a public offering.
        Union Bank of India  UNBK.NS  had raised 50 billion
rupees through a QIP in August.
    Last week, Punjab National Bank  PNBK.NS  approved raising
aggregate 75 billion rupees via equity.
    The Nifty PSU Bank index  .NIFTYPSU  rallied 32.30% in 2023,
outperforming the bank index  .NSEBANK  and financial services
index  .NIFTYFIN .
    "State-run banks have cleaned up their balance sheets well
and their valuations are still at a discount," said Vinod Nair,
head of research at Geojit Financial Services.
    
($1 = 83.1650 Indian rupees)

 (Reporting by Siddhi Nayak and Dharamraj Dhutia; Editing by
Swati Bhat and Varun H K)
 ((Siddhi.Nayak@thomsonreuters.com; +91 22 6921 7848; Reuters
Messaging: Twitter: https://twitter.com/siddhiVnayak))