The government has announced a recapitalisation package for PSU banks totaling Rs 2.1 trillion, with Rs 1.53 trillion from the government funded through (i) Rs 180 bn of announced infusion through the budget, and (2) Rs 1.35 trillion through recap bonds. We are positively surprised by the quantum of the recapitalisation and it matches our estimates of capital requirements for PSU banks for both NPA provisioning and some growth. Assuming the entire infusion is equity in nature (we are still unclear whether this is debt/equity), there would be significant dilution for minority investors, but given that current prices are higher than FY17 adjusted book values for most PSU banks, this recap package should drive a re-rating in PSU banks. Among our coverage stocks, we expect the highest positive impact on PNB (Buy rated).
The recap package — takes care of all requirements in one stroke
The recap package of Rs 2.1 trillion is in two parts: (i) Rs 760 bn of infusion, of which Rs 180 bn is the budgetary allocation for FY18-19 left under the old recap scheme, and Rs 580 bn is assumed to be raised through the market by banks directly, (ii) Rs 1.35 trillion of recap bonds to be issued by the government to PSU banks and then the money will be used to infuse capital into PSU banks. While it’s unclear whether the infusion will be equity or debt, we assume all this infusion to be equity capital (CET-1 capital). Assuming (i) CET-1 of 9.5%, (ii) 60% provisioning on all stress, (iii) 7% CAGR in RWAs over FY18-19F, and (iv) current trends of PPOP for PSU banks, we estimate CET-1 capital requirements for PSU banks at `1.5-1.6 trillion and hence the announced package takes care of not only provisioning requirement on stressed assets, but also growth capital.
Infusion highly dilutive but very positive for FY19 adjusted books
We would again like to start with one caveat: that for all analysis we assume the Rs 1.35 trillion of infusion to all be equity capital. The Rs 1.5-1.6 trillion infusion will lead to 0-200% dilution for PSU banks. The dilution in most cases will be 50-125%. At first glance the quantum of this dilution would look high for minority investors, but in most PSU banks the current stock price is higher than the adjusted FY17 book value, and hence raising at current or higher prices will have a positive impact on FY19 adjusted book value. (i) There is an impact on reported book, which will be negative, as infusion will be below reported FY17 book, but (ii) There is a positive impact on adjusted book values as the static pool of stress provisions is spread over the expanded equity base and this more than nets off the negative impact. Among our coverage PSU bank universe, we expect re-rating in all names. The quantum of positive impact should be highest for PNB (Buy rated), as (i) Adjusted book multiples on FY17 basis are higher than for BOI/Union, and (ii) PNB is more sensitive to capital availability than SBI/BOB.
PSU recap takes care of all requirements in one stroke
Recap package of Rs 2.1 trillion is in two parts: (i) Rs 760 bn of infusion, of which Rs 180 bn is the budgetary allocation for FY18-19 left under the old recap scheme and Rs 580 bn is assumed to be raised by banks directly. (ii) Rs 1.35 trillion of recap bonds to be issued by the government to PSU banks and then the money will be used to infuse capital into PSU banks. We estimate capital requirement of Rs 1.5-1.6 trillion for PSU banks in FY18-19F: Assuming (i) CET-1 of 9.5%, (ii) 60% provisioning on all stress, (iii) 7% CAGR RWAs over FY18-19F, and (iv) current trend of PPOP for PSU banks, we estimate the CET-1 capital requirement for PSU banks at Rs 1.5-1.6 trillion and hence the announced package takes care of almost all of not only provisioning requirement but also growth capital.