After $17 billion worth of AT1 bonds issued by Credit Suisse were written down to zero following the bank’s takeover by rival lender UBS, investors are now wary of their exposure to such high-risk bonds. Offering some relief to Indian investors, analysts have now said that Indian banks have very little exposure to AT1 bonds.
Additional Tier 1 (AT1) bonds are risky debt instruments that do not have a maturity date. They offer better returns when compared to other debt papers but they carry an additional risk that kicks in during times of financial emergency. As was the case with the recent Credit Suisse debacle, lenders can choose to stop paying interest or even write off these bonds when it is facing capital crunch.
Various analysts have now said that Indian banks do not depend on AT1 bonds much, reducing the risk to its customers. In a research note, brokerage firm Macquarie said that while India’s PSU banks have an exposure of 1-2 per cent to AT1 bonds, private sector banks only have an exposure of around 0-1 per cent.
According to data published by Jefferies, State Bank of India (SBI) holds 1.5 per cent of its risk-weighted assets (RWA) in the form of AT1 capital. Fellow state-backed bank Canara Bank holds 2.20 per cent of its RWA as AT1. In the case of private banks, HDFC Bank, ICICI Bank and Axis Bank hold 0.8 per cent, 0.5 per cent and 0.6 per cent of its RWA as AT1 respectively. Jefferies also said in its report, “Local bond market investors are not really seeing risks here for Indian stocks.”
Specifically noting the case of SBI, Macquarie said in its note, “State-run banks' common equity Tier-1 capital ratios are low and a weak AT-1 bond market could necessitate equity capital raising, particularly in the case of the State Bank of India.”
Notably, Yes Bank holds 0.5 per cent of its RWA in the form of AT1 instruments. The lender made its AT1 bonds infamous in the Indian markets when it decided to write them down earlier during its restructuring process. Following that decision, investors had taken the bank to court for its move and the case is presently ongoing in the Supreme Court.