Some PSBs face AT1 bonds coupon challenge, says Crisil

Mumbai, Oct 12 (IANS) A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some Indian public sector banks (PSBs) and hamper their near-term ability to service coupon on Additional Tier 1 (AT1) bonds issued under Basel III capital regulations, ratings agency Crisil said on Wednesday.

As on date, 14 PSBs have Rs 226 billion of AT1 bonds outstanding.

Though the Union government committed capital support to PSBs to sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds, the agency said.

“Apart from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable. Of these, four have AT1 bonds outstanding, where continued losses could wipe out their revenue reserves and pose a challenge when it comes to coupon servicing. The other two have not issued any AT1 bonds so far,” said Crisil’s Senior Director (Financial Sector and Structured Finance Ratings) Krishnan Sitaraman.

According to the agency, four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves (after adjusting for expected losses) to service coupon on AT1 bonds outstanding. “However, their ability to continue to do so over the medium term will depend on a return to profitability,” a statement said.

On the other hand, 11 banks are expected to report a profit in the near term (or have sizeable revenue reserves despite weaker profitability), which would help them service coupon obligations on AT1 bonds over the medium term.