Moody's Investors Service, a global rating agency, has said that State Bank of India's issuance of additional tier 1 (AT1), Basel III-compliance capital securities -- the first international issuance of such securities by an Indian bank -- will set a pricing benchmark for other issuers, and provide Indian banks with an alternative funding option.
"We expect more Indian banks will look to raise capital via this route to overcome some of the limitations of the domestic bond market," says Alka Anbarusa, a Moody's Vice President and Senior Analyst. "In particular, most Basel III securities issued by the banks domestically have been privately placed, thereby offering limited liquidity for investors."
Moody's on 14 September 2016 assigned a B1 (hyb) rating to the perpetual non-cumulative capital securities issued by SBI, DIFC branch. The terms and conditions of the capital securities incorporate Basel III-compliant non-viability language in accordance with Reserve Bank of India (RBI) guidelines, and will qualify as Additional Tier 1 (AT1) capital securities.
Coupled with other recent measures to strengthen its capitalization, including a capital infusion from the Indian government (Baa3 positive) announced in July, the issuance will boost SBI's loss-absorbing capacity and help it manage its legacy problem assets -- a challenge also faced by many of the country's other banks, the agency said.
The key terms of the issuance are broadly in line with the standards adopted by the Basel committee. However, the trigger threshold for loss absorption is set at a level higher than the 5.125 per cent recommended by the Basel committee, namely at 5.5% until 31 March 2019, and at 6.125% on or from 31 March 2019.
Nevertheless, Moody's does not consider the securities as "high trigger" capital securities. This is because even though the trigger threshold is above the Basel recommended level, Indian AT1 securities will not absorb losses prior to the trigger events as defined by the RBI. Their loss absorption is at the point of non-viability and not in advance of a bank failure.
This contrasts Moody's interpretation high trigger capital securities are designed to absorb losses prior to a bank-wide failure.
India adopted the use of AT1 securities on 1 April 2013. Since then, Indian banks have issued about INR106 billion (USD1.6 trillion) of Basel III-compliant AT1 securities in the domestic market.