CNX PSU Bank at 9-month high on Basel-III relief

Written by fe Bureau | Mumbai | Updated: Mar 29 2014, 09:48am hrs
Shares of PSU banks ended 3-10% higher on the NSE as the Reserve Bank of India (RBI) extended the deadline for the full implementation of Basel-III norms by a year to March 31, 2019. The decision pushed the CNX PSU Bank to a near nine-month high.

The RBI, in a notification on Thursday, said: This (implementation of Basel-III capital regulations) may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel-III capital regulations. Accordingly, the transitional period for full implementation of Basel-III capital regulations in India is extended up to March 31, 2019, instead of as on March 31, 2018.

In terms of Basel-III capital regulations issued by the RBI, the Capital Conservation Buffer (CCB) will be implemented from March-end 2016 (against March-end 2015 earlier).

The capital conservation buffer of 0-2.5%, due to be implemented in phases over FY15-18, will now be implemented over FY16-19. To that extent, overall Tier-1 requirement as per Basel-III guidelines is now lower by approximately 60 bps over FY15-18, Kotak Institutional Equities said in a note on Friday.

The State Bank of India scrip ended 3.9% higher at R1,908.60 on the NSE. Punjab National Bank scrip ended 7.8% higher at R760. Oriental Bank of Commerce (10.39%), Bank of India (8.91%) and Canara Bank (7.04%) were among the other major gainers. The CNX PSU Bank ended 4.73% higher.

Analysts feel among state-owned lenders, United Bank of India and Central Bank are likely to benefit the most.

As of Q3FY14, United Bank of India had Tier-1 ratio of 5.6% and Central Bank of India 7%. Both banks would have had to raise 15-45% of their current market cap to enhance Tier-1 capital to partially meet the regulatory requirements for FY15. The regulation for FY15E would increase by 100 bps of Tier-1 capital next year under the earlier guidelines, but under the new guidelines the increase would be only 50 bps, Kotak Institutional Equities added in its report.

The Central Bank of India scrip ended 6.59% higher at R49.35, while United Bank ended 6.63% higher at R29.75.

According to experts, the deadline extension eases pressure on PSU banks as their capital requirements remain higher due to low profitability and deteriorating asset quality. Given the low profitability and high provisioning requirement, PSU banks will actually be consuming capital at a fast pace. In our view, these banks would have needed to raise $30-45 billion of capital by F2018, Morgan Stanley analysts said in a recent note.

According to the Basel-III norms, the Tier-I capital must be at least 7%, while the total capital (Tier 1 + Tier 2) must be at least 9% on an ongoing basis. Experts feel private banks are better-placed with regards to the norms than their public counterparts.