Four PSBs face bonds coupon challenge

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, it 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, Crisil said.

It has observed that some banks are reporting revenue reserves in their audited balance sheets without adjusting for P&L losses. Instead, these losses are being shown as a negative ‘Balance in P&L Account’ on the liability side.

As a result, reported revenue reserves do not deplete despite losses. For loss-making banks, the ability to service coupon on AT1 bonds depends only on adequacy of revenue reserves. “The Basel III-compliant AT1 bonds are meant to be loss-absorbing in times of stress and hence when rating them, CRISIL considers revenue reserves net of P&L losses to assess a bank’s ability to service coupon,” Rajat Bahl, director, Financial Sector Ratings, Crisil, said.

On the criteria for rating AT1 bonds, Crisil has highlighted the additional risks to investors because of their equity-like features. Consequently, such ratings would be typically two notches lower than the corporate credit rating (CCR) of the bank.