PSU Bank Recapitalisation Dilemma
By Abhinandan Tulsian
Market and market experts are quite apprehensive on the requirement of Rs. 2,40,000 crores, by the PSU banks, to meet their BASEL III norms, deadline for which is 31st March 2019.
However, we have a different view, as there is a lot of room and bandwidth to mobilise this amount, due to the following reasons, in support thereof:
- There are 24 listed PSU banks, as can be seen from the annexed table.
- Market capitalisation of these banks is Rs. 3,78,448 crores, at the close of Friday 11-07-2014.
- GoI stake is intended to be kept at 51%, in all these banks.
- If GoI divests part of its stake, to bring it down to 51% in these banks, it can mobilise Rs. 44,804 crores.
- However, as the Govt. has to pump in money, to shore up the capital adequacy of these banks, every year, there is no rationale of GoI divesting its stake on one hand to 51% and then pumping in money on the other hand towards re-capitalisation.
- Budget 2014 has estimated a requirement of about Rs. 2,40,000 crores in these bank, by end of 2018, to meet the BASEL III norms. Below are the Basel III norms:
| (% of RWAs) | |||||||
| Min. capital ratios | Apr 1, 2013 | Mar 31, 2014 | Mar 31, 2015 | Mar 31, 2016 | Mar 31, 2017 | Mar 31, 2018 | Mar 31, 2019 |
| Min. Tier 1 Capital | 4.5 | 5 | 5.5 | 5.5 | 5.5 | 5.5 | 5.5 |
| Capital conservation buffer (CCB) | - | - | - | 0.625 | 1.25 | 1.875 | 2.5 |
| By A + B, Min Tier 1 Capital | 4.5 | 5 | 5.5 | 6.125 | 6.75 | 7.375 | 8 |
| Min. Tier 1 Capital* | 6 | 6.5 | 7 | 7 | 7 | 7 | 7 |
| Min. Total Capital* | 9 | 9 | 9 | 9 | 9 | 9 | 9 |
| Min. Total Capital + CCB | 9 | 9 | 9 | 9.625 | 10.25 | 10.875 | 11.5 |
| Tier 1 Common Equity = Common shares, stock surplus, statutory reserves, capital reserves, other free reserves, balance in P&L account of previous years, part of profit of current year, MINUS regulatory adjustments and deductions. | |||||||
| Tier 1 Additional = Prepetual non-cumulative preference shares and associated share premium, eligible debt instruments, other notified instruments, MINUS regulatory adjustments and deductions. | |||||||
| Tier 2 = General provisions and loss reserves, debt instruments issued by banks, other preference share instruments and associated share premium, revaluation reserves at discount of 55%, other notified instruments, MINUS regulatory adjustments and deductions. | |||||||
| * Additional Tier 1 Capital is 1.5% and Tier 2 Capital is 2% | |||||||
- So, it is obvious that stake of GoI will be brought down to 51%, in these banks, by making fresh issue. This can give Rs. 87,851 crores to the banks, as per current valuation.
| Sr. No. | Bank Name | Share Price (11/7/14) | GoI stake | M Cap (11/7/14) | Proceeds from sale to reduce GoI stake to 51% | Proceeds from fresh issue to reduce GoI stake to 51% |
|
|
| (Rs.) | (%) | (Rs. Cr.) | (Rs. Cr.) | (Rs. Cr.) |
| 1 | Allahabad Bank | 115 | 58.90 | 5,700 | 450 | 883 |
| 2 | Andhra Bank | 82 | 60.14 | 4,600 | 420 | 824 |
| 3 | Bank of Maharashtra | 48 | 85.21 | 3,200 | 1,095 | 2,147 |
| 4 | BoB | 785 | 56.26 | 33,000 | 1,736 | 3,404 |
| 5 | BoI | 262 | 66.70 | 16,000 | 2,512 | 4,925 |
| 6 | Canara Bank | 390 | 69.00 | 17,000 | 3,060 | 6,000 |
| 7 | Central Bank | 68 | 88.63 | 7,000 | 2,634 | 5,165 |
| 8 | Corporation Bank | 365 | 63.33 | 5,600 | 690 | 1,354 |
| 9 | Dena Bank | 73 | 58.01 | 1,600 | 112 | 220 |
| 10 | IDBI | 88 | 76.50 | 12,000 | 3,060 | 6,000 |
| 11 | Indian Bank | 161 | 81.51 | 7,000 | 2,136 | 4,188 |
| 12 | IOB | 69 | 73.80 | 2,200 | 502 | 984 |
| 13 | OBC | 270 | 59.13 | 8,000 | 650 | 1,275 |
| 14 | PNB | 875 | 58.87 | 31,000 | 2,440 | 4,784 |
| 15 | PSB | 66 | 81.42 | 1,700 | 517 | 1,014 |
| 16 | SBBJ | 582 | 75.07 | 4,100 | 987 | 1,935 |
| 17 | SBI | 2420 | 58.60 | 1,80,000 | 13,680 | 26,824 |
| 18 | SBM | 545 | 90.00 | 2,600 | 1,014 | 1,988 |
| 19 | SBT | 580 | 78.91 | 3,400 | 949 | 1,861 |
| 20 | Syndicate Bank | 142 | 67.39 | 8,600 | 1,410 | 2,764 |
| 21 | UCO Bank | 95 | 77.20 | 7,200 | 1,886 | 3,699 |
| 22 | Union Bank | 187 | 60.13 | 11,148 | 1,018 | 1,996 |
| 23 | United Bank | 50 | 89.47 | 3,300 | 1,270 | 2,489 |
| 24 | Vijaya Bank | 50 | 74.06 | 2,500 | 577 | 1,130 |
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|
|
| Total (Rs. cr.) | 3,78,448 | 44,804 | 87,851 |
- However, this amount of Rs. 87,851 crores will get mobilised over next 5 years. If we expect the share price to double in the next 4-5 years, of all these banks, due to better working, consolidation and improvement in assets quality, one can mobilise Rs. 1,75,000 crores, to bring down GoI stake to 51%. One can take average of this at Rs.1,40,000 crores.
- It must get noted that infusion of Rs. 2,40,000 crores is necessary into the Bank, to shore up its capital. Hence, divestment by GoI to bring down its stake to 51% is not seen sensible, correct and feasible.
- GoI has provided Rs. 11,200 crores in this Budget, as re-capitalisation . If we presume it to be at around Rs. 11,000 crores, for next 5 years, GoI will infuse about Rs. 55,000 crores in these banks.
- Since Govt. will be infusing about Rs. 55,000 crores in the next 5 years, an identical amount can be raised by the banks as well, as GoI stake has to be brought down to 51%.
- So there is room and possibility of mobilising Rs. 2,50,000 Cr.
- However, Rs. 1,95,000 crores needs to get mobilised via QIP and from retail investors, for which stock market has to remain bullish and vibrant.
- So, if GoI provides stable tax regime with consistency, as also, assures tax advantage of STCG and LTCG to the retail investors, which is presently denied by the Income tax authorities, on the pretext of taking it as business income, it is possible to mobilize the required amount.
So why this hue and cry and pessimism now only, on requirement of this amount of Rs. 2,40,000 crores?