Loss-making PSU banks including SBI may find the going more tough

Loss-making PSU banks including SBI may find the going more tough

Public sector banks that made losses or experienced sharp dip in profit in the last fiscal could lose their ability to service coupon on additional tier-1 (AT1) bonds issued under the Basel III capital regulations, ratings company Crisil has said in a report.

A sharp dip in profitability and mounting losses could wipe out the revenue reserves of some public sector banks, it said. As many as 13 of the 21 public sector lenders (taking the State Bank of India and its associates as a consolidated entity) reported losses for fiscal 2016, and almost half of them could do so again this fiscal, the ratings company said.

Crisil, however, did not divulge the names of the banks in risk of defaulting on the AT1 bond coupon payment. As on date, 14 banks have Rs 22,600 crore of additional tier-1 bonds outstanding.

The government has committed capital support to the banks it owns to sustain their capital ratios above the regulatory minimum of 9%, but the coupon on AT1 bonds can be serviced only through current year’s profit or from revenue reserves.

Hence, capital infusion alone cannot improve a bank’s ability to service coupon on the bonds, the report said. “Apart from the 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,” said Krishnan Sitaraman, senior director at Crisil.

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 the coupon on AT1 bonds outstanding. But, their ability to continue to do so over the medium term will depend on the return to profitability.

Crisil observed that some banks report revenue reserves in their audited balance sheets without adjusting for profit and losses account. 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 the 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,” said Rajat Bahl, director - financial sector ratings, at Crisil.

Source:BankingUpdates