CARE upgrades by a notch AT1 bonds ratings of 4 state-owned lenders

Agency sees improvement in capital cushions over minimum regulatory requirement, improvement in profitability.

CARE upgraded by a notch ratings for additional tier I bonds (AT I bonds) of state-owned Canara Bank, Indian Bank, Punjab National Bank and Union Bank on strengthening of their credit profile, said the analyst.

AT I Bonds are perpetual debt instruments banks raise under the Basel III capital framework and form a part of Tier I capital for banks.

CARE upgraded Canara Bank and Indian Bank from “AA” to “AA+”. Punjab National Bank and Union Bank’s bonds moved from “AA-” to “AA”.

There is improvement in capital cushions over minimum regulatory requirement, improvement in both profitability as well as the distributable reserves position of these four public sector banks.

With the strengthening of the resolution of non-performing assets under the Insolvency and Bankruptcy Code (IBC), the banks have seen recoveries in some of the large NPAs. 

They have also made higher provisions for bad assets and set aside money as provisions in anticipation of expected losses due to Covid-19. This has increased the provision coverage ratio (PCR) and provided strength to the balance sheets of these banks, the rating agency said.

There has been government and regulatory support by way of broadening the definition of distributable reserves to include more categories of reserves as distributable reserves. They were allowed to set-off accumulated losses against the share premium account. This increased the ability of PSBs to service the coupons of AT I Bonds, reiterating the stance to extend support even to hybrid instruments.

PSBs are expected to receive capital support well in advance so that the coupon payment trigger is not breached in future, CARE said.

AT1 bonds, as financial instruments, have features that make them different from other types of debt instruments and provide them equity.

Under Reserve Bank of India’s regulatory norms for AT1 bonds, the issuing bank has full discretion over coupon payments at all times on these instruments. Therefore, a bank may not pay a coupon if it does not have sufficient distributable reserves to service the coupon on AT I Bonds.

These bonds also have loss-absorption features through conversion, write-downs and write-off on breach of pre-specified trigger on capitalisation requirement or at the point of non-viability (PONV) which may be decided by the regulator.