In the Finance Bill 2015-16, the government allocated just $1.3 billion (R7900 crore) for recap of PSU banks against our estimated needs of $50-80 billion till FY19. This is also lower than the run-rate of $2.5-3.0 billion being allocated for the past few years for PSU bank re-capitalisation. The amount allocated is almost the same as our estimate of total dividend likely to be paid by all PSU banks to the government in FY16. This indicates that government capital infusion going forward could be a function of only the profit generation ability of PSU banks. With 42% of PSU banks already with Tier1 < 8% (62% with Tier-1 < 9%), lack of capital will continue to constrain the ability to grow. Smaller/weaker PSU banks with limited ability to raise capital from markets will be worst affected as there is very little likelihood of getting capital next year as well.
Among other proposals, the government proposed formation of bank bureau. The government appears to have in principle effected the recommendations of the Nayak Committee and has proposed setting up a Bank Boards Bureau (BBB), responsible for selection of PSU Bank’s top management and to find ways to meet capital requirements. It also signalled its intent of moving towards a holding company structure for PSU banks. However, this needs legislative changes as well and therefore the time line remains uncertain.
Distinction between FII and FDI within sectoral limit has been removed raising the composite cap for private banks to 74%. Key beneficiaries will be Axis and Yes Bank. Continued capital constraints on PSU Banks will also accelerate market share gains for private banks.
The FM announced that all NBFCs with an asset size of R500 crore-plus will be able to access the Sarfaesi Act provisions. Prior to this, only housing finance companies were eligible for it. Thus, all secured lenders (like CV, auto financiers—Shriram Transport Finance and Mahindra & Mahindra Financial Services) will find it easier to repossess NPA assets without having to go to court . While this is a positive, companies say the volume of repossessions in their business models is limited.
The continuing capital constraints on PSUs will further accelerate the market share shift to private banks and therefore this budget provides more reason to Overweight them relative to the PSUs. Only, Bank of Baroda (outperform) that is relatively better capitalised can be a play on the potential reform of setting up of the bank bureau. Lower capital allocation was negative for capital-starved banks (Tier-1 < 8%) like Bank of India (BOI), Union Bank, Indian Overseas Bank (IOB) – all underperform.
By Credit Suisse