Indian hybrid markets shaken
The Reserve Bank of India’s (RBI) decision to permanently write down Yes Bank Ltd’s additional Tier-1 (AT1) instruments contrasts sharply with the approach taken for similar instruments issued by the country’s public-sector banks.
The Yes Bank event has shaken Indian hybrid markets and underlines the distinction between AT1s issued by the country’s public sector banks, and those from privately owned lenders.
S&P Global Ratings has also taken this moment to review how Indian AT1s compare and contrast with AT1s issued elsewhere in Asia, in an FAQ published today titled “AT1s–The Great Indian Divide.”
The Indian government is working with the State Bank of India (SBI) to inject capital into Yes Bank, a troubled private-sector bank with 1.8% of the country’s bank deposits (as of March 31, 2019).
SBI will infuse capital into the bank, acquiring up to a 49% stake.
The draft resolution terms of the bailout scheme requires Yes Bank to write down about Rs.87 billion (US$1.2 billion) of outstanding AT1s.
AT1 investors have filed a petition against the RBI, Yes Bank and the government, noted S&P in its report on the banking sector on 13 Mar 2020.
Media reports indicate that parties are exploring an out-of-court settlement, with AT1 investors clamoring for conversion of AT1s to equity.
“The event has rattled India’s bank hybrid markets — it’s been a hot topic among local investors in the past week. A complete write-down would likely raise the risk premium that investors price into Indian hybrids,” said S&P Global Ratings credit analyst Deepali Chhabria.
This would create losses for asset managers and raise capital costs for issuers.
S&P Global Ratings shares its perspective on AT1s in India and how it compares with other Asian markets.
Under the Basel III framework, AT1 instruments are designed to be loss absorbing, meaning that holders of the debt might not get repaid in the event of financial stress.
Indian regulations state that such instruments should absorb losses while the bank remains a going concern.
The rules state further that the loss absorption should be either through conversion into common shares or through a write-down mechanism, which allocates losses to the instrument at a pre-specified trigger point.
This trigger point is this: common equity Tier 1 (CET1) of 6.125% of risk weighted assets, or that regulators have taken the view the issuer has passed the point of non-viability.
Indian banks’ AT1s categorically provide that any capital infusion by the government of India into the issuer as the promoter of the issuer in the normal course of business may not be construed as a point of non-viability trigger.
The thinking goes that, since the government owns the bank, it has the right to inject capital into the lender.
The government has indeed been pumping regular capital into state-owned banks to help them meet their regulatory requirements. A couple of years back, most of the public sector banks were also allowed to exercise early call options for their AT1 instruments under what was deemed a “regulatory event”.
“We took the view at the time that we were no longer certain that AT1s issued by Indian public-sector banks would absorb losses on a going-concern basis, if needed, or become a permanent part of a bank’s capital structure. On the other hand, we have always maintained that the Indian regulator would not likely extend such flexibility to the private-sector banks.
“Events have supported this view. RBI’s decision to permanently write down Yes Bank’s AT1s is in line with our view that these instruments will absorb losses at private-sector banks, not public-sector banks,” said Chhabria. fiinews.com
