* Regulatory change unleashes glut of bank capital raisings
By Krishna Merchant
SINGAPORE, Dec 12 (IFR) - Indian banks are queuing up to
raise Additional Tier 1 capital after the Insurance Regulatory
Authority of India (IRDA) last week permitted insurance
companies to invest in Basel III-compliant AT1 bonds for the
IRDA has allowed insurers to invest in AT1 rupee bonds with
local ratings of AA and above, opening up a new source of demand
for the subordinated securities after a long wait.
Last week, private-sector lender Axis Bank priced
an AT1 offering with a call option after five years (non-call
five) at 8.75 percent. It is said to have raised 30 billion
rupees ($445 million) and insurance companies are heard to have
picked up nearly 2 billion rupees of the bonds. Axis has yet to
make an official announcement on final price, size and tenor.
Vijaya Bank, a mid-sized public sector lender,
also said it intended to raise 7.5 billion rupees from AT1
instruments. Bank of Baroda recently printed 10 billion
rupees of AT1 bonds at 8.5 percent.
"Now, there is demand from insurers, besides mutual funds,
banks and institutional investors," said a Baroda source. "Banks
are able to down-sell these bonds," he said.
Banks benefit from the wider investor base, and it also
allows insurance companies to take advantage of the yield
"Given the interest rate environment, one would naturally
expect demand from the insurance industry. At higher yields, one
is able to lock in for a longer term," said S Gopalakrishnan,
chief investment officer at ICICI Lombard General Insurance.
Double A rated AT1s are priced close to 9 percent, compared
to AA corporate bonds, which offer a yield of 7.56 percent for a
five-year tenor, according to Thomson Reuters data.
"Insurance companies will go through the process of amending
their investment polices, etc" to allow investment in such
instruments, Gopalakrishnan said.
The insurance regulator has eased rules for investments in
AT1 bonds at a time when banks need to shore up their capital
levels. Fitch estimates that Indian banks will require $90
billion in new capital by FY19 to meet Basel III requirements,
of which close to $30 billion will come from AT1 bonds.
While some incremental demand is expected to pour in from the
insurance industry, analysts feel that stringent guidelines
might reduce the scope of investment.
"There are not too many banks that can achieve AA ratings
for their AT1 bonds, and the list is possibly restricted to
about the top few large banks," said Saswata Guha, director at
Under the IRDA guidelines, AT1 investments are treated as
equity. Therefore, insurers like Life Insurance Corp of India,
which already has large exposure to a particular bank's equity,
may be reluctant to invest in an equity-like structure which
offers returns of 9-10 percent. State Bank of India's shares,
for example, have already gained 17 percent this year.
LIC's exposure is already close to the 15 percent cap it can
hold in most of the state-owned banks, according to Prime
"It limits the scope in terms of how much demand for AT1 may
come from the insurance route," Guha said.
IRDA guidelines say that individual insurers cannot invest
more than 10 percent in a single bank's AT1 issue. For example,
if the issue size is 10 billion rupees, each insurer can invest
only up to 1 billion rupees.
Some analysts feel that limit could lead to better price
discovery as banks will have to use the electronic bidding
process to place the bonds with multiple investors, compared
with earlier bilateral deals placed to mutual funds.
Still, insurers are wary of being seen as easy targets for
banks looking to raise cheap capital. Given the loss-absorbing
features of AT1 bonds, some insurance fund managers are not
comfortable buying these at such low yields.
Some have also flagged concerns that the pricing of AT1 bonds in
the domestic market in the recent past is much closer to senior
debt than in the overseas market, as foreign investors demand a
higher premium for the risk of unpaid coupons, equity conversion
or principal writedowns.
"When the system is surplus with liquidity, the risk on such
instruments will not be adequately factored in. This is what
happens historically," said Aneesh Srivastava, chief investment
officer from IDBI Federal Life Insurance.
The banking system is flush with liquidity after the
government last month banned old 500 and 1,000 rupee notes in a
crackdown on unreported savings, or black money.
"For insurance to buy AT1 bonds will not be easy in the
current environment as there is uncertainty surrounding coupon
payment ability of banks," said Srivastava. "We are in a
long-term business; we don't want to take any risk on returns
that we want to earn."
IRDA has also said that insurers can only invest in bonds
from banks that have declared dividends for the preceding two
years, in line with its requirement for equity investments.
Among India's major public sector banks, only State Bank of
India, Union Bank, Oriental Bank of Commerce, Andhra Bank and
Punjab and Sind Bank have paid dividends in 2015 and 2016,
according to Kotak Institutional Equities Research, which rules
out most of the public sector banks in the near term.
While allowing insurers to invest in AT1 bonds increases the
depth of the market, a sizable portion of banks' capital demands
will still have to come through other means.
"Banks, at some point, have to start looking at the
international market if they have to fulfil their AT1
requirement, through either dollar issuance and/or through the
Masala bond route," said Guha of Fitch.
(Reporting by Krishna Merchant; editing by Daniel Stanton and