Negative or low revenue reserves coupled with a decline in profitability could make six public sector banks (PSBs) vulnerable and hamper their ability to service coupon on Additional Tier 1 bonds, credit rating agency Crisil said on Wednesday.
Public sector banks have been been plagued with asset quality issues and while the government has committed capital support to help them sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through the current year’s profit or from revenue reserves. Hence, capital infusion by the government cannot improve the bank’s ability to service coupon on these bonds, the agency said.
Thirteen out of 21 PSBs (taking the State Bank of India and its associates as a consolidated entity) reported losses for FY16, and almost half of them could do so again this fiscal. As of date, 14 PSBs have R226 billion of AT1 bonds outstanding.
“Of these (six banks), 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,” Rajat Bahl, director, financial sector ratings at Crisil, said.
Four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves to service coupon. However, their ability to continue to do so over the medium term will depend on a return to profitability, according to the agency.
