Yoosef KP & Sundar Sethuraman
Stocks of state-owned banks were on fire on Wednesday following the the government’s promise of a capital infusion of a whopping RS 2.1 lakh crore. The trading session was dominated by shares of these banks, which added a chunky Rs 1.2 lakh crore in market capitalisation. Interestingly, foreign portfolio investors shopped for equities worth $550 million on Wednesday, the first time they have spent as much in 100 sessions save one. Expectedly, the country’s biggest lender, State Bank of India — which should get a good share of the infusion — rallied 27.7%, adding Rs 60,812 crore in market value. The Nifty PSU Bank index, which has not gone anywhere over the past year, rose by nearly 30% with Punjab National Bank gaining more than 46%.
Christening the move a “Capital Bazooka”, analysts at Kotak Institutional Equities wrote they expect the move to help accelerate resolution on NPLs (non-performing loans) as banks mark down their impaired loans, though they were not sure growth would rebound immediately. “With this capital infusion, we expect public banks to be far more comfortable in taking haircuts, entering into one-time settlements with borrowers or increasing their provisioning requirements as mandated by NCLT (National Company Law Tribunal),” they wrote, estimating total issuance at around 30% of outstanding gross NPLs or about 20% of the total stress loans. They expect banks to participate in a special bond issuance of the government which would be used by the latter to infuse back as capital in these banks.
Analysts at Nomura noted that even assuming the entire infusion was equity in nature, the recap package should drive a re-rating as current prices are higher than FY17 adjusted book values for most PSUbanks. That would be despite the significant dilution for minority investors. Credit Suisse analysts felt the infusion would enable a step-up in provisioning. “The provisioning needs of the banks are rising as now 40-45% of NPAs (non-performing assets) are likely to move to the Insolvency and Bankruptcy Code. This along with increasing minimum regulatory capital requirements would have pushed the banks into a vicious cycle of low capital-low growth,” they said. PSBs have been short of capital due to large provisions needed for loan losses and might not have met the stringent capital adequacy norms specified by the regulator in line with global norms. The fresh dose of capital would ensure they have enough to set aside as provisions and also start lending once again, analysts said.
Though the finer points aren’t known, the government plans to issue Rs 1.35 lakh crore of recap bonds while banks would mop up another Rs 76,000 crore from budgetary support and the markets. The earlier Indradhanush plan had envisaged an infusion of only Rs 70,000 over four years between FY16 and FY19, clearly inadequate in the current circumstances when more bankruptcies might require state-owned lenders to make larger provisions.