In a significant development for India's banking sector, Canara Bank has broken the year-long silence in the additional tier-1 (AT-1) bond market with a substantial ₹3,500 crore issue, marking the first such offering in the current financial year. This move is expected to reopen the perpetual bond window for Indian lenders and could trigger a wave of similar capital raises from other public-sector banks.
The AT-1 Bond Comeback
The Bengaluru-based lender has invited bids on the National Stock Exchange for its AT-1 bond issue, which is anticipated to be priced at a coupon rate between 7.5% and 7.55%. This development comes after nearly twelve months of inactivity in this segment of the bond market, with the last AT-1 bond issuance occurring in October 2024 when State Bank of India raised ₹5,000 crore at a 7.98% coupon rate.
According to banking industry sources, Canara Bank's decision has already prompted several other state-owned lenders to prepare their own bond issuances. Punjab National Bank (PNB), Bank of India, Union Bank of India, and Bank of Maharashtra have begun sounding out investment bankers for potential AT-1 bond offerings. Additionally, Bank of Baroda is examining a tier-II bond raise as part of its capital planning strategy.
Following the Leader: Other Banks Queue Up
The response from other public sector banks has been immediate and substantial. Punjab National Bank is planning to raise up to ₹5,000 crore through AT-1 bonds, comprising a ₹2,000 crore base issue with a ₹3,000 crore greenshoe option. Union Bank of India is looking to borrow up to ₹2,000 crore via AT-1 bonds and an additional ₹4,000 crore through tier-II bonds in December, according to sources familiar with the matter.
Banking executives believe that if Canara Bank's bond issue receives strong investor demand at reasonable pricing, it could immediately open the floodgates for more AT-1 supply from public-sector banks. A senior treasury official emphasized that "everyone is ready with approvals" and that pricing will be the deciding factor for subsequent issuances, noting that banks currently have multiple capital-raising avenues available.
The current yield environment shows Canara Bank's expected coupon of 7.5-7.55% is slightly higher than ICICI Bank's recent tier-II bond issuance, while the 10-year benchmark government bond yield stands at approximately 6.51%.
Understanding AT-1 and Tier-II Bonds
AT-1 bonds, or additional tier-1 bonds, are perpetual instruments that comply with Basel-III regulations and feature trigger points linked to a bank's capital and earnings levels. These are among the riskiest bank capital instruments available to investors, as interest payments can be halted if certain capital thresholds are breached. In the repayment hierarchy, AT-1 bondholders stand last, a risk highlighted during the 2020 Yes Bank restructuring when its AT-1 bonds were fully written off.
Tier-II bonds, meanwhile, represent subordinated debt issued to meet regulatory capital requirements. While still carrying higher risk than conventional fixed-income instruments, they rank above equity holders in the repayment sequence during liquidation scenarios and typically offer higher yields to compensate for their risk profile.
Broader Banking Sector Context
The renewed interest in bond issuances marks a strategic shift for Indian banks, which had largely stayed away from the local bond market for most of the year. This change comes amid several key developments in the banking sector:
Credit and Deposit Dynamics: As of October 31, non-food credit growth stood at 11% year-on-year, down from nearly 12% a year earlier. Meanwhile, deposit growth has been even more subdued at 9.7%, compared with 11.8% in the previous year.
Liability Management Strategy: According to Soumyajit Niyogi, Director at India Ratings and Research, "Bond issuances have become a key contributor to liability management for banks. Tightness in the deposit market has actually led banks to look for more bond issuances." He anticipates some credit pickup in the second half of the year, particularly if tariff situations improve.
Private Sector Movement: Private sector lenders have already been active in the bond market. ICICI Bank raised ₹3,945 crore through 15-year tier-2 bonds at 7.40% on November 27, while Axis Bank secured ₹5,000 crore via 15-year infrastructure bonds at 7.27% on November 25.
State Bank of India, which had initially considered an AT-1 issue before opting for a dollar bond after India's sovereign rating upgrade in September, returned to the domestic market in October with a tier-2 sale that raised ₹7,500 crore—the first bank bond issue of the year.
Funding Challenges and Market Outlook
Indian banks continue to face challenges related to the cost of liabilities, with yields in the debt market having hardened in recent months. The loan-to-deposit ratio (LDR) has been inching upward while deposit growth rates have struggled to keep pace, forcing banks to explore non-deposit funding channels more aggressively.
Even after recent policy rate cuts, the transmission to lending rates has been incomplete, limiting banks' ability to expand credit affordably. This environment has made bond issuances an increasingly attractive option for capital management.
In FY25, Indian banks raised ₹1.32 trillion through various bond instruments, including ₹29,400 crore in tier-2 bonds, ₹8,000 crore in tier-1 bonds, and ₹94,488 crore in infrastructure bonds. This represents a significant increase from FY24, when the total stood at ₹1.02 trillion, with ₹13,864 crore raised via tier-2 bonds, ₹17,516 crore via AT-1 bonds, and ₹71,081 crore through infrastructure bonds.
As Canara Bank's AT-1 bond issue tests investor appetite for these higher-risk instruments, the entire banking sector watches closely. The success or failure of this offering could determine whether other public sector banks proceed with their planned capital raises or seek alternative funding sources in the coming months.
