4 PSBs may default on AT-1 bonds' coupon

Continued losses erase revenue reserves

Rating agency CRISIL on Wednesday said four ailing public sector banks (PSBs) may fail to pay interest on additional Tier-I bonds as mounting losses could wipe out their revenue reserves.

As many as 13 of the 21 PSBs reported losses in FY16 and almost half of them may post losses again in FY17. The tally of PSBs considers the State Bank of India and its associates as a consolidated entity.

As on date, 14 PSBs have Rs 22,600 crore of AT-1 bonds outstanding. CRISIL declined to disclose the names of the four state-owned banks, which run the risk of defaulting on coupon payment. This is an industry-level study and CRISIL is not giving out names, Krishnan Sitaraman, senior director, CRISIL said.

CRISIL said some banks are reporting revenue reserves in their audited balance sheets without adjusting for profit and losses. Instead, these losses are being shown as negative balance in P&L accounts 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 AT-1 bonds depends only on adequacy of revenue reserves.

The Basel III-compliant AT-1 bonds are meant to be loss-absorbing in times of stress. Hence, CRISIL considers revenue reserves net of P&L losses to assess a bank’s ability to service coupon.

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 AT-1 bonds outstanding, where continued losses could wipe out their revenue reserves. The other two have not issued any AT-1 bonds so far.

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 AT-1 bonds outstanding. However, their ability to continue to do so over the medium term will depend on a return to profitability.

The 11 banks are expected to report a profit in the near term (or have sizeable revenue reserves despite weaker profitability), helping them service coupon obligations on AT-1 bonds over the medium term.