Canara Bank’s successful issuance of Basel-III compliant tier-I bonds marks a significant moment for the bond market, potentially paving the way for other banks to follow suit.
The bank raised Rs 3000 crore through these bonds at a coupon rate of 8.27%, demonstrating robust demand despite recent changes in valuation methodology. This issuance, the first of its kind in the current financial year, saw full subscription and could signal increased confidence among investors for similar offerings.
Following Canara Bank’s issuance, other large public sector banks are preparing to issue tier-I bonds to meet their funding requirements. The State Bank of India, the country’s largest lender, is anticipated to be among the next issuers, according to reports.
The Tier-I bonds issued by Canara Bank on August 27 were fully subscribed, with the coupon slightly below market expectations. The bank received 96 bids totalling Rs 46.58 billion, with a range of 7.95% to 8.47%. Notably, the base issue size of Rs 10 billion attracted bids at a coupon of 8.19%. The successful sale is attributed to strategic timing and the bank’s efforts to avoid competing with other issuers during a high-supply period.
Impact of valuation changes
The issuance’s success occurred despite recent adjustments in the valuation guidelines for additional Tier-I (AT1) bonds by the Securities and Exchange Board of India (SEBI). These new rules allow mutual funds to value AT1 bonds based on their call option date rather than as 100-year securities. However, the impact of these changes appears limited, as mutual funds showed limited participation in Canara Bank’s offering.
The positive reception of Canara Bank’s bond sale is expected to influence other banks’ decisions to enter the market with similar instruments. While the first-mover advantage played a role, the inherently risky nature of perpetual bonds and recent market history could affect future demand. The bond’s coupon rate was 138 basis points higher than the five-year benchmark government bond yield, indicating a continued risk premium.
