Four public sector banks that had reported heavy losses due to a surge in bad loans may struggle to make coupon payments on their additional tier 1 (AT1) bonds, according to Crisil.
The credit rating agency has projected that almost half of the 13 public sector banks that had reported losses in 2015-16 are likely to do so again this fiscal year.
“A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some 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,” Crisil said in a report.
Fourteen public sector banks raised Rs.22,600 crore through AT1 bonds. While the Centre has committed capital support to PSBs to sustain their capital ratios above the 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, according to Crisil.
“Apart from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable,” Krishnan Sitaraman, Senior Director, Financial Sector and Structured Finance Ratings, CRISIL said in an interview. “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.”
Crisil has divided the 21 public sector banks into three buckets. In the first bucket there are 11 banks that are expected to report profit. The second bucket has 4 lenders, which could report losses but have adequate reserves to service coupon payments.
It is the third bucket of six that could prove challenging as four, which had sold AT1 bonds and have challenging reserve positions, could also report further losses in the current financial year putting them in a spot, Mr. Sitaraman said.
The rating agency also observed that some banks were reporting revenue reserves in their audited balance sheets without adjusting for P&L losses. Instead, the losses were being shown as a negative ‘Balance in P&L Account’ on the liability side.
