Elevating Capital: State Bank of India’s Successful Raise of Rs 5,000 Cr via AT1 Bonds

State Bank of India (SBI), the country’s largest lender, has successfully raised Rs 5,000 crore through the issuance of additional tier-1 (AT1) bonds on January 18, 2024. The bond sale received an overwhelming response from a diverse range of investors, with an oversubscription of 2.65 times and 108 bids worth Rs 5,294 crore against the base size of Rs 2,000 crore .

What are AT1 bonds?

AT1 bonds are a type of perpetual bonds that do not have any fixed maturity date but offer relatively higher interest rates as they are considered quasi-equity instruments with larger risk of investment. They have a call option that allows the issuer to redeem them after a certain period, usually 10 years. AT1 bonds are also known as Basel III compliant bonds as they help banks meet the capital adequacy norms prescribed by the Basel Committee on Banking Supervision .

Why did SBI issue AT1 bonds?

SBI issued AT1 bonds to bolster its long-term non-equity capital and enhance its ability to absorb losses and withstand economic uncertainties. The bank’s chairman, Dinesh Khara, said that the tight pricing and the diverse investor base for an instrument that has its own challenges shows the trust investors place in the bank . The bank also said that the issuance is significant as it has been able to diversify and raise long-term non-equity regulatory capital . SBI had earlier raised Rs 4,000 crore through AT1 bonds in September 2023 at a coupon rate of 8.50% .

Who were the main investors in SBI’s AT1 bonds?

The main investors in SBI’s AT1 bonds included mutual funds, provident and pension funds, banks, and insurance companies, among others . Some of the state-owned lenders such as Bank of Baroda, IDBI Bank and Punjab National Bank were likely to have purchased SBI’s bonds . The coupon rate for the bonds was set at 8.34%, payable annually .

What are the benefits and risks of investing in AT1 bonds?

Investing in AT1 bonds can offer higher returns than other fixed-income instruments as they carry higher interest rates. They can also provide regular income through annual coupon payments. However, investing in AT1 bonds also involves higher risks as they are subordinate to all other debt instruments and can be written off or converted into equity in case the bank’s capital falls below a certain threshold. Moreover, they are subject to market fluctuations and liquidity issues as they are not traded frequently .