Indian State Banks Eye Equity Fundraising As Perpetual Bonds Lose Appeal
Indian state-run banks are likely to shift from perpetual bonds to the equity market for fundraising in the upcoming months due to diminishing interest in perpetual bonds, as informed by five banking sources to a media housing.
During this fiscal year, Indian banks, including State Bank of India, have raised approximately 8700 crore rupees (USD 1.05 billion) through perpetual bonds, which is only about a quarter of the funds raised in fiscal 2023. Most banks have struggled to meet their targeted amounts at auctions.
"As deposit rates rise, banks face the prospect of higher coupon payments on their debt securities, particularly as mutual funds are shying away from investing in perpetual debt," explained a senior official from a major state-run bank.
The Securities Exchange Board of India declared in March 2021 that additional Tier 1 bonds would be treated as having a maturity of 100 years, starting April 2023. This decision significantly reduced mutual fund investments in such bonds, complicating fundraising efforts.
Last year, demand for these bonds decreased further after Credit Suisse wrote off around USD 17 billion of its additional Tier 1 debt during its merger with UBS.
"Given the challenging scenario with AT-I bonds, banks might turn more to the equity route for fundraising, considering the improving valuations," remarked another banker.
State-run banks have already taken steps towards equity fundraising. Bank of India and Indian Bank recently raised 4500 crore rupees and 4000 crore rupees, respectively, through qualified institutional placement (QIP) of shares. Union Bank of India also raised 5000 crore rupees through a QIP in August.
Moreover, Punjab National Bank has approved raising 7500 crore rupees through equity issuance.
The Nifty PSU Bank index showed a notable 32.30 per cent surge in 2023, outperforming other banking and financial services indices.
"State-run banks have significantly improved their balance sheets, and despite this, their valuations remain discounted," stated Vinod Nair, head of research at Geojit Financial Services.
