IDBI Bank opts for AT-1 bonds to raise Rs 1,500 cr

Close on the heels of State Bank of India planning to use additional tier-I bonds (AT-1) to raise capital, another Mumbai-based public sector bank IDBI Bank is raising Rs 1,500 crore via same instrument.

Ironically, issuance by IDBI Bank will happen at a time when the ratings agency ICRA has flagged risks over capability of public sector banks' ability to service coupon (interest payments). The huge losses reported by many PSBs in 2015-16 and weak balance sheets, depleting revenue reserves of banks are reasons behind the agency's pessimism.

Some public sector banks, SBI being an exception, are using AT-i bonds to shore-up capital adequacy as they are finding it tough to issue fresh equity shares to raise capital. Their shares are trading at discount to book value.

There is pressure on the net distributable reserves and credit balance of some PSBs due to loss and tidy amounts set aside as provision for bad loans.

SBI plans to raise Rs 11,000 crore via Tier-1 bonds through one or more tranches in domestic and international markets.

Under Basel III norms banks have restrictions on payment of interest and principal for AT-1 bonds, linking it to financial health of issuer. Karthik Srinivasan, Senior Vice President and Co Head-Financial Sector Ratings, ICRA Limited, said the risk of not being able to honour interest payment obligation for some of these bonds has increased.

Such a risk could crystalise should the profits of the current year prove to be inadequate in 2016-17 for payment obligation. The accumulated distributable reserves have depleted significantly over FY16 and Q1FY17.

Cumulatively, PSBs have issued close to Rs 17,000 crore of Basel 3-compliant Additional Tier-1 (AT-I) bonds. The volume of AT-I issuance has so far remained much lower than the PSBs capital requirements under Basel 3 norms, on account of weak investor appetite.

Bank has full discretion at all times to cancel distribution and payments and cancellation of discretionary payments shall not be an event of default. Coupon is not cumulative. That is there is no accumulated obligation to pay coupon after skipping payment.

Coupon on AT-1 instruments must be paid out of distributable items i.e. current year profits or in case of loss in a year from revenue reserves or credit balance in profit & loss account.

Payment of coupons on AT-1 from the revenue reserves is subject to bank meeting minimum regulatory requirements for CET1, Tier 1 and total capital ratios at all times and capital buffer frameworks.

 

Name of the bank / Amounts in Rs billion Revenue reserves as on March 31, 2016 (A) Credit balance in P&L account as on March 31, 2016 (B) Net distributable reserves (A+B) as on March 31, 2016 Net distributable reserves as % of total assets as on March 31, 2016 Profit / loss made during Q1, FY2017 Basel 3 compliant AT1 instruments outstanding
Allahabad Bank 31.05  (3.60) 27.45 1.20%  (5.65)  -
Andhra Bank     24.49      0.95  25.44 1.30%  0.31  13.00
Bank of Baroda     80.23         -   80.23 1.20%  4.24  13.82
Bank of India     93.98    (62.49)  31.49 0.50%  (7.41)  25.00
Bank of Maharashtra     13.30      0.60  13.90 0.90%  (3.97)  10.00
Canara Bank     84.81    (28.13)  56.68 1.00%  2.29  15.00
Central Bank of India     23.44    (25.34)  (1.90) -0.10%  (6.00)  -
Corporation Bank     27.87      (5.06)  22.81 1.00%  0.36  5.00
Dena Bank     20.93      (9.35)  11.58 0.90%  (2.79)  14.00
IDBI Bank     67.39    (28.27)  39.12 1.10%  2.41  15.00
Indian Bank     66.59      0.96  67.55 3.40%  3.07  5.00
Indian Overseas Bank     24.61    (34.24)  (9.63) -0.40%  (14.51)  10.00
Oriental Bank of Commerce     37.50      0.01  37.51 1.60%  1.01  5.00
Punjab & Sindh Bank      1.09     18.13  19.22 1.90%  0.53  -
Punjab National Bank    137.26         -   137.26 2.10%  3.06  15.00
State Bank of India    346.53         -   346.53 1.50%  25.21  -
Syndicate Bank     55.33    (15.65)  39.68 1.30%  0.79  8.70
UCO Bank      4.00      7.28  11.28 0.50%  (4.41)  -
Union Bank of India     49.60         -   49.60 1.20%  1.66  -
United Bank of India      (5.30)         -   (5.30) -0.40%  0.38  1.50
Vijaya Bank      0.13     13.37  13.50 0.90%  1.62  10.00

 Source: Banks, ICRA research; Amounts in Rs billion


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